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School District of the City of Muskegon Heights

REPORT ON FINANCIAL STATEMENTS (with required supplementary information)

Year ended June 30, 2011

School District of the City of Muskegon Heights

TABLE OF CONTENTS

Management’s Discussion and Analysis ............................................................................................... i - x Independent Auditors’ Report .................................................................................................................... 1 Basic Financial Statements District-wide Financial Statements Statement of Net Assets ...................................................................................................................... 3 Statement of Activities ........................................................................................................................ 4 Fund Financial Statements Governmental Funds Balance Sheet ................................................................................................................................... 5 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets ............................................................................................ 6 Statement of Revenues, Expenditures and Changes in Fund Balances (Deficit) ............................................................................................................ 7 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances (Deficit) to the Statement of Activities .......................................................................... 8 Statement of Fiduciary Assets and Liabilities ..................................................................................... 9 Notes to Financial Statements .............................................................................................................. 10 Required Supplementary Information Budgetary Comparison Schedule—General Fund ................................................................................ 30 Schedule of Funding Progress—Retiree Medical Plan ......................................................................... 31

Muskegon Heights Public Schools Management's Discussion and Analysis For the Fiscal Year Ended June 30, 2011

i

This section of Muskegon Heights Public Schools’ annual report represents an overall review of the school district’s financial activities for the fiscal year ended June 30, 2011. Please review in conjunction with the financial statements and notes to the financial statements to enhance an understanding of the district’s financial performance. The Governmental Accounting Standards Board (GASB) in their Statement No. 34 Basic Financial Statements adopted this reporting model – and Management Discussion and Analysis (MD&A) – for State and Local Governments issued in June of 2000. Certain comparative information between the current year and the prior year is required to be presented in the MD&A. Overview of the Financial Statements This annual report consists of four parts: (1) management’s discussion and analysis, (2) independent auditors’ report, (3) the basic financial statements, and (4) required supplementary information. The financial statements include notes that explain information in the statements by providing detailed data. These statements are followed by a section of required supplementary information that further explains and supports the financial statements, utilizing a comparison to the district’s budget for the year. Additionally, the basic financial statements also include two kinds of statements that present different views of the district. District-wide Financial Statements The district-wide financial statements are full accrual basis statements that provide information about the district’s overall financial status. They are used to help determine whether or not the district is better off, or worse off, as the result of the year’s activities. The Statement of Net Assets reports all of the district’s assets and liabilities, both short-term and long-term, whether they are “currently available” or not. Capital assets and long-term obligations of the district are reported in this statement. All of the current year’s revenues and expenses are accounted for in the Statement of Activities, regardless of when cash is received or paid. The two district-wide statements report the district’s net assets and how they have changed. Net assets – the difference between the district’s assets and liabilities – are used to measure the district’s financial position.

• Over time, increases or decreases in net assets are an indicator of whether the district’s financial position is improving or deteriorating.

• To assess the district’s overall health, you need to consider additional non-financial

factors such as changes in the district’s property tax base, the quality of the education provided, and the condition of the district’s buildings.


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In district-wide statements, the district’s activities are classified as governmental activities. This includes most of the district’s basic services, such as regular and special education, food service, athletics, transportation, and administration. Property taxes, state aid, and state and federal grants finance most of these services. Fund Financial Statements The fund financial statements focus on individual parts of the district, while reporting the district’s operations in more detail than the district-wide statements. The fund level statements are reported on a modified accrual basis. Only those assets that are “measurable” and “currently available” are reported. Liabilities are recognized to the extent that they are paid with current financial resources. Fund statements are formatted to comply with the legal requirements of the Michigan Department of Education’s “Accounting Manual.” In the State of Michigan, the district’s major instructional and instructional support activities are reported in the General Fund. Additional activities are reported in their relevant funds including: Food Service, Debt Service, Capital Projects, and Fiduciary Funds. In fund financial statements, capital asset purchases are reported as expenditures in the year of acquisition. No asset is reported. The issuance of debt is recorded as a financial resource. The current year’s payments of principal and interest on long-term obligations are recorded as expenditures. Future year’s debt obligations are not recorded.

Financial Analysis of the District as a Whole Figure A-1 shows a condensed breakdown of the net assets. The decrease in current assets stems from increased cash and cash equivalents, reduced accounts receivable, and reduced receivables from other governmental units when compared to the 2009/10 school year. The decrease in capital assets can be attributed to depreciation expense incurred during the 2010/11 school year. The increase in total liabilities stems from additional state aid loan borrowing. This borrowing was necessary due to the recognition of lower student enrollment at the beginning of the school year and an increase in retiree legacy costs. In addition, Michigan Public School Employees Retirement System (MPSERS) contributions increased significantly, as well as district-paid contributions toward current employee healthcare and other necessary operational expenses. Please refer to the “General Fund Budgetary Highlights” section of this report for further explanation of these costs.


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June 30, 2011 June 30, 2010

Current Assets $ 5,370,340 $ 5,421,245 Capital Assets, net 25,355,530 26,359,054 Other Non Current Assets 1,060,891 912,308 Total Assets 31,786,761 32,692,607

Current Liabilities 13,979,794 9,955,861 Non Current Liabilities 26,003,634 26,692,181 Total Liabilities 39,983,428 36,648,042

Net Assets Invested in Capital Assets, 2,277,308 2,621,744 net of related debt Restricted for: Debt Service 991,620 881,795 Unrestricted (11,465,595) (7,458,974)

Total Net Assets $ (8,196,667) $ (3,955,435)

Figure A-1Condensed Statement of Net Assets

Governmental Activities

The district’s net assets also reflect investment in capital assets (e.g., land, buildings and improvements, and furniture and equipment), less any related debt used to acquire those assets that are still outstanding. The district uses these capital assets to provide services to students; consequently, these assets are not available for future spending. Although the district’s investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay the debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.


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Figure A-2 provides the detail behind the changes in the district’s net assets. Revenues classified under “charges for services” include amounts received for special education transportation and other receipts from those who have benefited from the related programs. Revenue generated from operating grant and contribution activities decreased due to lower district participation in those activities. Downward adjustments in unrestricted grants and contributions were the result of lower student enrollment.

Total expenses decreased due to staff retirement, staff layoffs, and increased contracted staffing.

For the Periond Ending: June 30, 2011 2010

RevenuesProgram Revenues

Charges for Services $ 465,683 $ 478,800Operating Grants and contributions 7,476,410 9,815,218

General RevenuesProperty taxes 2,926,825 3,036,505Unrestricted grants and contributions 9,908,512 10,070,016Other 25,930 23,114Total revenues 20,803,360 23,423,653

ExpensesInstruction 12,415,852 12,836,169Support services 8,765,663 9,495,104Community services 1,234,905 1,377,881Food services 1,123,551 1,177,598Athletics 368,649 377,368Interest on long-term debt 1,115,088 1,136,927

Total expenses 25,023,708 26,401,047

Other changes Depreciation and amortization (20,884) (20,884)

Increase (decrease) in net assets (4,241,232) (2,998,278)

Beginning net assets (deficit) (3,955,435) (957,157)

Ending net assets (deficit) $ (8,196,667) $ (3,955,435)

Figure A-2Statement of Net Assets from Operating Results

Governmental Activities


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A substantial portion (68%) of the district’s General Fund revenue is received from State sources. This means that the financial stability of the district rests primarily with the economic health of the State of Michigan and level of student enrollment. Figure A-3 depicts the General Fund breakdown of the sources of revenue for the district.

Fig. A-3

Local13%

State 68%

Federal19%


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Figure A-4 depicts 66% of the district’s General Fund resources are spent on instruction and pupil support services. Another 12% is spent on administrative and business services necessary to efficiently operate the district, while 15% is spent for building operation and maintenance, including utilities, custodial services and transportation. The final 7% is spent on community and other support services.

Figure A-4

Instruction53%

Pupil and Instructional Support Services

13%

Central & General Administration

5%

Community Services5%

Athletics1%

Business & School Administration

7%

Operations & Transportation

15%

Other1%


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Financial Analysis of the District’s Funds

The General Fund fund balance decreased by $4,276,679 during the 2010/11 fiscal year, resulting in a fund deficit of $8,472,543 at year-end. The primary operational reasons for the deficit increase are detailed in the aforementioned “Financial Analysis of the District as a Whole” section of this document.

General Fund Budgetary Highlights The Uniform Budget Act of the State of Michigan requires that the local Board of Education approve the original budget for the upcoming fiscal year prior to July 1, the start of the fiscal year. As a matter of practice, the district can amend its budget during the school year. These revisions are designed to address unexpected changes in revenues and expenditures that may or may not occur during the school year. During fiscal year 2011, a budget amendment was approved by the board of education in March of 2011. Original Budget v. Amended Budget

Revenues

• State source revenue was downward adjusted for lower than expected pupil count and reduced At-Risk funding.

• Federal source revenue was adjusted upward for the Edujobs grant, State Stabilization grant, and unspent federal carry-over from FY 2009-10.

Expenditures

• Basic program expenditures were adjusted downward for mid-year employee lay-offs and retirements.

• Added needs expenditures were adjusted downward for mid-year employee lay-offs and reduced supplemental education related teaching expenses.

• Adult and continuing education expenditures were upward adjusted for additional adult education staff.

• Pupil support expenditures downward adjusted for a reduction in behavior specialist positions.

• Instructional staff expenditures were reduced for lower projected Title I-A and II-A expenditures.

• School administration expenditures were upward adjusted for higher potential principal transition costs.


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• Business expenditures were downward adjusted for lower projected State Aid Note interest costs.

• Central support expenses were adjusted downward for reductions in Title II-A staff training.

• Outgoing transfers and other transactions were upward adjusted for greater projected food service transfers.

Amended Budget v. Actual Results

Revenues

• Local source revenue was lower than anticipated due to prior period revenue adjustments.

• Federal source revenue was lower than projected due to disallowed federal costs, deferred revenue, and unused federal award allocations.

Expenditures

• Basic program expenditures were higher than projected due to greater basic program teacher costs.

• Added needs expenditures were lower due to lower actual added needs teacher costs.

• Adult and continuing education teaching costs were lower than projected.

• Instructional staff costs were higher because of greater than expected program director costs.

• General administration costs were greater than expected because of higher legal and audit fees.

• School administration transition costs were lower than projected.

• Business service costs were greater than projected due to higher contracted service, equipment, and interest costs.

• Operations and maintenance costs exceeded budget due to higher utility costs.

• Pupil transportation costs were less than projected due to lower actual bus driver costs.

• Athletic program costs were higher than projected due to greater coaching costs.

• Community service costs were lower than projected due to reductions in Workfirst and Head Start expenditures

• Outgoing food service transfers were lower than projected due to greater operational efficiencies within the food service program.


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Capital Assets and Debt Administration Capital Assets – At June 30, 2011, the district had over $25 million in net capital assets, including land, buildings, furniture and equipment as shown below. The primary reason for the decrease in capital asset value is contributable to depreciation.

2011 2010

Land $ 1,475,734 $ 1,475,734Land Improvements 169,829 147,685Buildings and Improvements 22,993,965 23,933,837Equipment 678,219 780,233Vehicles 37,783 21,565 Total $ 25,355,530 $ 26,359,054

More detailed information about capital assets can be found in Note D of these financial statements. Debt Administration – At June 30, 2011, the district had $26.9 million in general obligation bonds and other long-term debt outstanding as shown below.

2011 2010

2006 Building General Obligation Bonds 20,126,093 20,865,9680% 2007 Energy Conservation Improvement Bonds 3,149,000 3,149,000Durant Bond Obligations 109,105 159,971School Bond Loan Fund 2,577,624 2,450,880School Loan Revolving Fund 639,805 616,459Education Interconnection and Consortium Financing 8,784 13,175Early Retirement Incentives and Compensated Absences 326,898 366,985

Total $ 26,937,309 $ 27,622,438

More detailed information about long-term debt can be found in Note H of these financial statements.


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Currently Known Facts, Decisions, and Conditions Affecting the 2011/12 Fiscal Year

• The district continues to experience declining enrollment • Muskegon Heights Public Schools (MHPS) is currently in the process of renegotiating its

major labor contracts. In addition, the district has sent out requests for proposals for clerical, custodial/maintenance, and transportation services

• The district is working with the Michigan Department of Education (MDE) and Muskegon Area Intermediate School District (MAISD) to eliminate its budget deficit

• The Office of Retirement Services (ORS) mandated employer contribution rate continues to increase at a substantial rate. In October 2011, the rate increases from 20% to 24.46% for employees hired before July 1, 2010 and 23.23% for employees hired after July 1, 2010. For fiscal year 2011/12, the State of Michigan has funded an estimated $132 per pupil to assist MHPS in offsetting this additional cost

• Health insurance premium rates continue to substantially increase

Requests for Information This financial report is designed to provide the district’s citizens, taxpayers, parents, students, investors and creditors with a general overview of the district’s finances, and to show how the district is accountable for the money it receives. Questions concerning any of the information provided in this report, or requests for additional financial information should be addressed to Dr. Dana M. Bryant, Superintendent, Muskegon Heights Public Schools, 2603 Leahy Street, Muskegon Heights, MI 49444, telephone number (231) 830-3221.

BRICKLEY DELONG CERTIFIED PUBLIC ACCOUNTANTS

678 Front Ave., NW Suite 230 316 Morris Ave., Suite 500, P.O. Box 999 907 S. State St., P.O. Box 331 Grand Rapids, MI 49504 Muskegon, MI 49443 Hart, MI 49420 PHONE (616) 742-1300 PHONE (231) 726-5800 PHONE (231) 873-1040 FAX (616) 742-1318 FAX (231) 722-0260 FAX (231) 873-0602 www.brickleydelong.com

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INDEPENDENT AUDITORS’ REPORT

December 28, 2011 Board of Education School District of the City of Muskegon Heights Muskegon Heights, Michigan We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the School District of the City of Muskegon Heights (the School District), as of and for the year ended June 30, 2011, which collectively comprise the School District’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the School District of the City of Muskegon Heights’ management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the School District of the City of Muskegon Heights, as of June 30, 2011, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note B, the School District has a deficit in the General Fund. In accordance with Government Auditing Standards we have also issued our report dated December 28, 2011, on our consideration of the School District of the City of Muskegon Heights’ internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

BRICKLEY DELONG

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Board of Education December 28, 2011 Page 2 Accounting principles generally accepted in the United States of America required that the management’s discussion and analysis, budgetary comparison information and schedule of funding progress on pages i - x and 30 - 31 be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

School District of the City of Muskegon Heights STATEMENT OF NET ASSETS

June 30, 2011

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Governmental activities

CURRENT ASSETSCash and cash equivalents 501,110$ Investments 654,000 Receivables 307,530 Due from other governmental units 3,878,531 Inventories 29,169

Total current assets 5,370,340

NONCURRENT ASSETSRestricted cash 645,202 Capital assets, net

Nondepreciable 1,475,734 Depreciable 23,879,796

Bond issuance costs, net 305,935 Note and interest receivable 109,754

Total noncurrent assets 26,416,421

Total assets 31,786,761

CURRENT LIABILITIESState aid loan 8,525,000 Accounts payable and accrued liabilities 3,824,371 Due to other governmental units 696,748 Bonds and other obligations, due within one year 933,675

Total current liabilities 13,979,794

NONCURRENT LIABILITIESBonds and other obligations, less amounts due within one year 26,003,634

Total liabilities 39,983,428

NET ASSETS (DEFICIT)Invested in capital assets, net of related debt 2,277,308 Restricted for debt service 991,620 Unrestricted (11,465,595)

Total net assets (deficit) (8,196,667)$

LIABILITIES AND NET ASSETS (DEFICIT)

ASSETS

The accompanying notes are an integral part of this statement.

School District of the City of Muskegon Heights STATEMENT OF ACTIVITIES For the year ended June 30, 2011

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Net (Expense)Revenue andChanges inNet Assets

Charges for Operating grants GovernmentalFunctions/Programs Expenses services and contributions activitiesGovernmental activities

Instruction 12,415,852$ 1,643$ 2,832,763$ (9,581,446)$ Support services 8,765,663 265,025 2,421,193 (6,079,445) Community services 1,234,905 51,671 1,178,112 (5,122) Food services 1,123,551 86,121 1,037,029 (401) Athletics 368,649 61,223 - (307,426) Interest on long-term debt 1,115,088 - 7,313 (1,107,775) Unallocated amortization 20,884 - - (20,884)

Total governmental activities 25,044,592$ 465,683$ 7,476,410$ (17,102,499)

General revenuesProperty taxes 2,926,825 Grants and contributions not restricted to specific programs 9,908,512 Investment earnings 12,452 Miscellaneous 13,478

Total general revenues 12,861,267

Change in net assets (4,241,232)

Net assets (deficit) at beginning of year (3,955,435)

Net assets (deficit) at end of year (8,196,667)$

Program Revenue


School District of the City of Muskegon Heights BALANCE SHEET Governmental Funds

June 30, 2011

5

General Fund1999 Capital

Projects Fund

2007 Energy Conservation

Bond Retirement Fund

Other governmental

funds

Total governmental

fundsASSETS

Cash and cash equivalents 483,000$ 3,750$ 14,346$ 14$ 501,110$ Investments 654,000 - - - 654,000 Receivables 305,588 - - 1,942 307,530 Due from other governmental units 3,816,524 - - 62,007 3,878,531 Due from other funds - 5,075 - 748,918 753,993 Inventories 22,612 - - 6,557 29,169 Restricted cash and cash equivalents - - 645,202 - 645,202

Total assets 5,281,724$ 8,825$ 659,548$ 819,438$ 6,769,535$

LIABILITIES AND FUND BALANCESLiabilities

State aid loan 8,525,000$ -$ -$ -$ 8,525,000$ Accounts payable 675,937 - - 333,314 1,009,251 Accrued liabilities 2,667,231 - - 643 2,667,874 Due to other governmental units 696,748 - - - 696,748 Due to other funds 753,993 - - - 753,993 Deferred revenue 435,358 - - 6,163 441,521

Total liabilities 13,754,267 - - 340,120 14,094,387

Fund balances (deficit)Nonspendable

Inventories 22,612 - - 6,557 29,169 Restricted for

Debt service - - 659,548 479,318 1,138,866 Capital projects - 8,825 - - 8,825

Unassigned (8,495,155) - - (6,557) (8,501,712)

Total fund balances (deficit) (8,472,543) 8,825 659,548 479,318 (7,324,852)

Total liabilities and fund balances 5,281,724$ 8,825$ 659,548$ 819,438$ 6,769,535$


School District of the City of Muskegon Heights RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET

TO THE STATEMENT OF NET ASSETS June 30, 2011

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Total fund balance (deficit)—governmental funds (7,324,852)$

Amounts reported for governmental activities in the Statement of Net Assets are different because:

Capital assets used in governmental activities are not current financial resources andare not reported in the governmental funds.

Cost of capital assets 42,937,106$ Accumulated depreciation (17,581,576) 25,355,530

Bond issuance costs are not capitalized and amortized in the governmental funds.Bond issuance costs 398,504 Accumulated amortization (92,569) 305,935

Other long-term note and interest receivable in governmental activities is notreported in the governmental funds. 109,754

Accrued interest in governmental activities is not reported in the governmental funds. (147,246)

Deferred revenue reported on the balance sheet that does not provide current financial resources is not reported as revenue in the governmental funds. 441,521

Long-term obligations in governmental activities are not due and payable in the current period and are not reported in the governmental funds. (26,937,309)

Net assets (deficit) of governmental activities in the Statement of Net Assets (8,196,667)$


School District of the City of Muskegon Heights STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES (DEFICIT)

Governmental Funds For the year ended June 30, 2011

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General Fund1999 Capital

Projects Fund

2007 Energy Conservation

Bond Retirement Fund

Other governmental

funds

Total governmental

fundsREVENUES

Local sourcesProperty taxes 1,350,638$ -$ -$ 1,576,187$ 2,926,825$ Investment earnings 1,571 89 10,645 147 12,452 Fees and charges 325,221 - - 86,121 411,342 Other 722,647 - - - 722,647

Total local sources 2,400,077 89 10,645 1,662,455 4,073,266

State sources 12,015,636 - - 105,445 12,121,081 Federal sources 3,368,856 - - 983,904 4,352,760

Total revenues 17,784,569 89 10,645 2,751,804 20,547,107

EXPENDITURESCurrent

Instruction 11,557,817 - - - 11,557,817 Support services 8,726,326 - - - 8,726,326 Community services 1,209,273 - - - 1,209,273 Food services - - - 1,058,493 1,058,493 Athletics 292,526 - - - 292,526

Debt servicePrincipal - - - 810,866 810,866 Interest and other charges - - 157 953,844 954,001

Capital projects - 100,748 - - 100,748

Total expenditures 21,785,942 100,748 157 2,823,203 24,710,050

Excess (deficiency) of revenues over (under) expenditures (4,001,373) (100,659) 10,488 (71,399) (4,162,943)

OTHER FINANCING SOURCES (USES)Transfers in - - 224,494 65,313 289,807 Transfers out (275,306) - - (14,501) (289,807)

Total other financing sources (uses) (275,306) - 224,494 50,812 -

Net change in fund balances (4,276,679) (100,659) 234,982 (20,587) (4,162,943)

Fund balances (deficit) at beginning of year, as restated (4,195,864) 109,484 424,566 499,905 (3,161,909)

Fund balances (deficit) at end of year (8,472,543)$ 8,825$ 659,548$ 479,318$ (7,324,852)$


School District of the City of Muskegon Heights RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES

AND CHANGES IN FUND BALANCES (DEFICIT) TO THE STATEMENT OF ACTIVITIES For the year ended June 30, 2011

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Net change in fund balances (deficit)—total governmental funds (4,162,943)$

Amounts reported for governmental activities in the Statement of Activities are different because:

Governmental funds report outlays for capital assets and bond issuance costs as expenditures;in the Statement of Activities these costs are depreciated and amortized over their estimated useful lives, respectively.

Depreciation and amortization expense (1,199,372)$ Capital outlay 174,964 (1,024,408)

Receipts of principal on notes receivable is revenue in the governmental funds, but the receipt reduces notes receivable in the Statement of Net Assets. (50,866)

Interest income on notes receivable is recorded in the Statement of Activitieswhen earned, but is not reported in governmental funds until received. (303)

Revenue reported in the Statement of Activities that does not provide current financial resources are not reported as revenue in the governmental funds. 307,423

Repayment of principal on long-term obligations is an expenditure in the governmental funds,but the repayment reduces long-term obligations in the Statement of Net Assets. 795,132

Interest expense on long-term obligations is recorded in the Statement of Activities when incurred, but is not reported in governmental funds until paid. (145,354)

Compensated absences and early retirement incentives are reported on the accrual method in the Statement of Activities and reported as expenditures when financial resources are used in the governmental funds. 40,087

Change in net assets (deficit) of governmental activities (4,241,232)$


School District of the City of Muskegon Heights STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES

Fiduciary Funds June 30, 2011

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Agency funds

ASSETSCash and cash equivalents 31,285$

LIABILITIES

Accounts payable 7,924$ Deposits held for others 23,361

31,285$


School District of the City of Muskegon Heights NOTES TO FINANCIAL STATEMENTS

June 30, 2011

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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the School District of the City of Muskegon Heights (School District) have been

prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The more significant of the School District’s accounting policies are described below.

Reporting Entity The School District is governed by an elected seven-member Board of Education (Board), which has

responsibility and control over all activities related to public school education within the School District. The School District receives funding from local, state, and federal government sources and must comply with all of the requirements of these funding source entities. However, the School District is not included in any other governmental reporting entity as defined by generally accepted accounting principles. In addition, the School District’s reporting entity does not contain any component units as defined in Governmental Accounting Standards Board Statement No. 14. Board members have decision-making authority, the power to designate management, the ability to significantly influence operations, and the primary accountability for fiscal matters.

District-wide and Fund Financial Statements District-wide Financial Statements The primary focus of district-wide financial statements is on the sustainability of the School District as an

entity and the change in the School District’s net assets resulting from the current year’s activities. The district-wide financial statements (i.e., the Statement of Net Assets and the Statement of Activities) report information on all of the non-fiduciary activities of the School District. For the most part, the effect of interfund activity has been removed from these statements. The district-wide financial statements categorize primary activities as either governmental or business type. All of the School District’s activities are classified as governmental activities.

In the district-wide Statement of Net Assets, the governmental activities column (a) is presented on a

consolidated basis and (b) is reported on a full accrual, economic resource basis, which recognizes all long-term assets and receivables as well as long-term debt and obligations. The School District’s net assets are reported in three parts – invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets.

The Statement of Activities demonstrates the degree to which the direct expenses of a given function or

segment are offset by program revenues. The School District first utilizes restricted resources to finance qualifying activities. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges paid by recipients who purchase, use or directly benefit from goods or services by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Property taxes, unrestricted state aid, and other unrestricted items are not included as program revenues but instead as general revenues.

The district-wide Statement of Activities reports both the gross and net cost of each of the School District’s

functions. The functions are also supported by general revenues (property taxes, certain intergovernmental revenues and charges, etc.). The Statement of Activities reduces gross expenses by related program revenues and operating grants. Program revenues must be directly associated with the function. Operating grants include operating-specific and discretionary (either operating or capital) grants. The School District does not allocate indirect costs.


June 30, 2011

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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued District-wide and Fund Financial Statements—Continued Fund financial statements Fund financial statements are provided for governmental funds and fiduciary funds, even though the latter are

excluded from district-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements.

In the fund financial statements, when expenditures are incurred in governmental fund types for purposes for

which both restricted and unrestricted (committed, assigned, or unassigned) amounts are available, it is the School District’s policy to consider that restricted amounts have been reduced first. When an expenditure is incurred for purposes for which amounts in any of the unrestricted fund balance classifications could be used, it is the School District’s policy that committed amounts would be reduced first, followed by assigned amounts and then unassigned amounts.

Governmental funds Governmental funds are those funds through which most School District functions typically are financed.

The acquisition, use and balances of the School District’s expendable financial resources and the related current liabilities are accounted for through governmental funds.

The School District reports the following major governmental funds:

• The General Fund is the School District’s primary operating fund. It accounts for all financial resources of the School District, except those required to be accounted for in another fund.

• The 1999 Building Capital Projects Fund accounts for the use of the proceeds from the 1999 School Building and Site Bonds. The Bonds were approved for issuance on March 9, 1999 and may be used for school building and site purposes.

• The 2007 Energy Conservation Bond Retirement Fund accounts for the resources accumulated and payments made for principal and interest of the 2007 Energy Conservation bonds.

The other nonmajor governmental funds are reported within the following types:

• The special revenue funds account for revenue sources that are legally restricted to expenditures for specific purposes (not including expendable trusts or major capital projects). The School District accounts for its food service activities in the school service special revenue funds.

• The debt service funds account for the resources accumulated and payments made for principal and interest on long-term general obligation debt of governmental funds.

• The capital projects funds account for the financial resources to be used for the acquisition of fixed assets or construction of major capital projects.

Fiduciary funds Fiduciary funds account for assets held by the School District in a trustee capacity or as an agent on behalf of

others. Trust funds account for assets held by the School District under the terms of a formal trust agreement. Fiduciary funds are not included in the district-wide statements.

• The agency fund is custodial in nature and does not present results of operations or have a

measurement focus. Agency funds are accounted for using the modified accrual basis of accounting. This fund is used to account for assets that the School District holds for others in an agency capacity (primarily student activities).


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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued Measurement Focus, Basis of Accounting and Basis of Presentation Accrual Method The district-wide financial statements are reported using the economic resources measurement focus and the

accrual basis of accounting as are the fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants, categorical aids and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Modified Accrual Method Governmental fund financial statements are reported using the current financial resources measurement focus

and the modified accrual basis of accounting. With this measurement focus, operating statements present increases and decreases in net current assets, and unreserved fund balance is a measure of available spendable resources. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the School District considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as compensated absences and claims and judgments, are recorded only when payment is due.

Property taxes, unrestricted state aid, intergovernmental grants, and interest associated with the current fiscal

period are all considered to be susceptible to accrual and have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when cash is received by the School District.

State Revenue The State of Michigan utilizes a foundation grant approach which provides for a specific annual amount of

revenue per pupil based on a statewide formula. The Foundation is funded from state and local sources. Revenues from state sources are primarily governed by the School Aid Act and the School Code of Michigan. The Michigan Department of Education administers the allocation of state funds to school districts based on information supplied by the school districts. For the year ended June 30, 2011, the foundation allowance was based on pupil membership counts taken in February and September of 2010.

The state portion of the foundation is provided primarily by a state education property tax millage of 6 mills

and an allocated portion of state sales and other taxes. The local portion of the foundation is funded primarily by non-homestead property taxes which may be levied at a rate of up to 18 mills. The state revenue is recognized during the foundation period and is funded through payments from October 2010 to August 2011. Thus, the unpaid portion at June 30, 2011 is reported as due from other governmental units.

The School District also receives revenue from the state to administer certain categorical education programs.

State rules require that revenue earmarked for these programs be used for its specific purpose. Certain governmental funds require an accounting to the state of the expenditures incurred. For categorical funds meeting this requirement, funds received, which are not expended by the close of the fiscal year are recorded as deferred revenue. Other categorical funding is recognized when the appropriation is received.


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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued Other Accounting Policies Deposit and Investments Cash and cash equivalents include cash on hand, demand deposits and short-term investments with a maturity

of three months or less when acquired. Pooled investment income is generally allocated to each fund using a weighted average of balances for the principal.

The School District reports its investments in accordance with GASB Statement No. 31, Accounting and

Financial Reporting for Certain Investments and for External Investment Pools. Under this standard, certain investments are valued at fair value as determined by quoted market prices or by estimated fair values when quoted market prices are not available. The standard also provides that certain investments are valued at cost (or amortized cost) when they are of a short-term duration, the rate of return is fixed, and the School District intends to hold the investment until maturity.

State statutes authorize the School District to invest in bonds and other direct and certain indirect obligations

of the U.S. Treasury; certificates of deposit, savings accounts, deposit accounts, or depository receipts of a bank, savings and loan association, or credit union, which is a member of the Federal Deposit Insurance Corporation, Federal Savings and Loan Insurance Corporation, or National Credit Union Administration, respectively; in commercial paper rated at the time of purchase within the three highest classifications established by not less than two standard rating services and which matures not more than 270 days after the date of purchase. The School District is also authorized to invest in U. S. Government or federal agency obligation repurchase agreements, bankers’ acceptances of U.S. banks, and mutual funds composed of investments as outlined above. The School District’s deposits and investments are in accordance with statutory authority.

Interfund Receivables and Payables

Activities between funds that are representative of lending or borrowing arrangements outstanding at the end of the fiscal year are referred to as either “due to/from other funds” (i.e., the current portion of interfund loans) or “advances to/from other funds” (i.e., the non-current portion of interfund loans). All other outstanding balances between funds are reported as “due to/from other funds”.

Property Taxes Property taxes levied by the School District are collected by various municipalities and periodically remitted

to the School District. The taxes are levied as of July 1 and December 1 and are due upon receipt of the billing by the taxpayer and become a lien on the first day of the levy year. The actual due dates are September 14 and February 14, after which time the bills become delinquent and penalties and interest may be assessed by the collecting entity.

Inventories Food service inventory is valued at the lower of cost (first-in, first-out) or market. The inventory is

expendable supplies held for consumption and is recorded as expenditures when consumed rather than when purchased. Inventories for commodities are recorded as revenue when utilized.

Prepaid Items Payments made to vendors for services that will benefit periods beyond the fiscal year end are recorded as

prepaid items using the consumption method. A current asset for the prepaid amount is recorded at the time of the purchase and an expenditure is reported in the year in which services are consumed.


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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued Other Accounting Policies—Continued Restricted Assets Assets are reported as restricted when limitations on their use change the normal understanding of the

availability of the asset. Such constraints are either imposed by creditors, contributors, grantors, or laws of other governments or imposed by enabling legislation. Restricted assets include bond proceeds to be used for capital construction.

Capital Assets Capital assets purchased or acquired are capitalized at historical cost or estimated historical cost. Donated

fixed assets are valued at their estimated fair market value on the date received. Capital assets are defined by the School District as assets with an initial cost of more than $5,000 and an estimated useful life in excess of one year. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Improvements are capitalized and depreciated over the remaining useful lives of the related fixed assets. The School District does not have infrastructure-type assets.

Depreciation is provided on the straight-line basis over the following useful lives: Land improvements 10-15 years

Buildings and improvements 15-40 years Equipment 5-10 years

Vehicles 10 years Land and certain land improvements are deemed to be inexhaustible capital assets, as the economic benefit or

service potential is used up so slowly that the estimated useful life is extraordinarily long. These inexhaustible assets are not depreciated.

Compensated Absences The liability for compensated absences reported in the district-wide statement consists of unpaid, accumulated

sick leave balances. The liability has been calculated using the vesting method, in which leave amounts for both employees who are currently eligible to receive termination payments and other employees who are expected to become eligible in the future to receive such payments upon termination are included.

For fund financial statements, no compensated absence liability is reported for current employees and a

compensated absence liability is reported for terminated employees only when the termination date is on or before year end.

Early Retirement Incentives For district-wide financial statements, the liability for early retirement incentives is reported when legally

enforceable. For fund financial statements, the liability for early retirement incentives is reported either 1) on the due date when there is a specified due date or 2) on the retirement date if it is before year end, when there is not a specified legally enforceable due date.

Deferred Revenue Deferred revenue arises when assets are recorded before revenue recognition criteria have been satisfied.

Grants and entitlements received before the eligibility requirements are met are also recorded as deferred revenue. On fund financial statements, receivables that will be collected after the available period are reported as deferred revenue.


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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued Other Accounting Policies—Continued Long-term Obligations In the district-wide financial statements, long-term debt and other long-term obligations are reported as

liabilities in the Statement of Net Assets. Bond premiums and discounts, as well as issuance cost, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt.

In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as

bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

Net Assets in District-wide Financial Statements Net assets represent the difference between assets and liabilities and are segregated into the following

components:

• Invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Pursuant to the Michigan School Accounting Manual Referent Group guidance for Michigan public school districts, School Bond Loan Fund and School Loan Revolving Fund debt is not considered to be capital related debt.

• Restricted net assets result when constraints placed on net asset use are either externally imposed by creditors, grantors, contributions, and the like, or imposed by law through constitutional provisions or enabling legislation.

• Unrestricted net assets consist of net assets which do not meet the definition of the two preceding categories. Unrestricted net assets often are designated, to indicate that management does not consider them to be available for general operations. Unrestricted net assets often have constraints on resources which are imposed by management, but can be removed or modified.

Fund Equity in Fund Financial Statements In the fund financial statements, governmental fund balance is presented in five possible categories:

a. Nonspendable—resources which cannot be spent because they are either 1) not in spendable form; or 2) legally or contractually required to be maintained intact.

b. Restricted—resources with constraints placed on the use of resources which are either 1) externally

imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or 2) imposed by law through constitutional provisions or enabling legislation.

c. Committed—resources which are subject to limitations the School District imposes upon its self at its

highest level of decision making, and that remain binding unless the limitations are removed in the same manner.


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NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued Other Accounting Policies—Continued Fund Equity in Fund Financial Statements—Continued

d. Assigned—resources neither restricted nor committed for which the School District has a stated intended use as established by the Board of Education or a body or official to which the Board of Education has delegated the authority to assign amounts for specific purposes.

e. Unassigned—resources which cannot be properly classified in one of the other four categories. The

General Fund is the only fund that reports a positive unassigned fund balance amount. Unassigned balances also include negative balances in the governmental funds reporting resources restricted for specific programs.

Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires

management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

NOTE B—STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY Budgets and Budgetary Accounting Budgets are adopted on a basis consistent with accounting principles generally accepted in the United States

of America. Annual appropriated budgets are adopted for the General Fund and special revenue funds. All annual appropriations lapse at year end.

The School District follows these procedures in establishing the budgetary data reflected in the financial

statements:

1. The Superintendent submits to the School Board a proposed operating budget for the fiscal year commencing on July 1. The operating budget includes proposed expenditures and the means of financing them. The level of control for the budgets is at the functional level as set forth and presented as required supplementary information.

2. Public hearings are conducted to obtain taxpayer comments. 3. Prior to July 1, the budget is legally adopted by Board of Education resolution pursuant to the Uniform

Budgeting and Accounting Act (P.A. 621 of 1978). The Act requires that the budget be amended prior to the end of the fiscal year when necessary to adjust appropriations if it appears that revenues and other financing sources will be less than anticipated or so that expenditures will not be in excess of original estimates. Expenditures shall not be made or incurred, unless authorized in the budget, in excess of the amount appropriated. Violations, if any, are noted in the required supplementary information section.

4. The Superintendent is authorized to transfer budgeted amounts within major expenditure functions within any fund; however, these transfers and any revisions that alter the total expenditures of any fund must be approved by the Board of Education.

5. Formal budgetary integration is employed as a management control device during the year.

6. The budget is amended during the year with supplemental appropriations, the last one approved prior to June 30, 2011.


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NOTE B—STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY—Continued Excess of Expenditures Over Appropriations For the year ended June 30, 2011, expenditures in the General Fund exceeded appropriations in the instruction

– basic programs function by $381,641, instructional staff function by $77,241, general administration function by $85,510, business function by $58,690, operations and maintenance function by $141,957, central function by $18,996, and athletics by $27,806.

Fund Deficits The Michigan State School Aid act states a district receiving money under this act shall not adopt or operate

under a deficit budget, and shall not incur an operating deficit in a fund during a school fiscal year. A district having an existing deficit or which incurs a deficit shall not be allotted or paid further sums under this act until the district submits to the Michigan Department of Education for approval a budget for the current fiscal year and a plan to eliminate the deficit not later than the end of the second fiscal year after the deficit was incurred. At June 30, 2011 the General Fund of the District had a deficit of $8,472,543. This initial budget for the fiscal year ending June 30, 2012 shows expenditures and outgoing transfers, exceeding revenues and incoming transfers by $1,604,510. The District continues to work with the Michigan Department of Education and is in the process of executing a deficit elimination plan.

School Bond Construction Compliance The 1999 Building Capital Projects Fund includes capital project activities funded with bonds issued after

May 1, 1994. For this capital project, the School District has complied with the applicable provisions of §1351(a) of the State of Michigan’s School Code.

Following is a summary of the revenue and expenditures in the 1999 Building Capital Projects Fund from the

inception of the fund through June 30, 2011.

1999 Building Capital Projects Fund

Revenue and bond proceeds $29,624,297 Expenditures 29,615,472

NOTE C—DEPOSITS AND INVESTMENTS As of June 30, 2011, the School District had the following investments:

Weighted average Standard

Fair maturity & Poor's Investment Type value (Days) rating Percent

External investment pool 674,289$ 52 not rated 51%U.S. Treasury Obligations -

State and Local Government Series 654,000 N/A not rated 49%

Total fair value 1,328,289$ 100%


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NOTE C—DEPOSITS AND INVESTMENTS—Continued

The School District voluntarily invests certain excess funds in external investment pools (Pools). The Pools are external investment pools of "qualified" investments for Michigan school districts. The Pools are not regulated nor are they registered with the SEC. The fair value of the School District's investments is the same as the value of the Pool shares. Interest rate risk The School District does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates.

Credit risk State law limits investments in commercial paper and corporate bonds to the three highest classifications

issued by nationally recognized statistical rating organizations. The School District has no investment policy that would further limit its investment choices.

Concentration of credit risk The School District does not have a concentration of credit risk policy. Concentration of credit risk is the risk

of loss attributed to the magnitude of the School District investment in a single issuer, by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized.

Custodial credit risk - deposits In the case of deposits, this is the risk that in the event of a bank failure, the School District's deposits may not

be returned to it. As of June 30, 2011, $395,202 of the School District's bank balance of $745,711 was exposed to custodial credit risk because it was uninsured and uncollateralized.

Custodial credit risk - investments The School District does not have a custodial credit risk policy for investments. This is the risk that, in the

event of the failure of the counterparty, the School District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party.

Foreign currency risk The School District is not authorized to invest in investments which have this type of risk.


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NOTE D—CAPITAL ASSETS Capital asset activity for the year ended June 30, 2011 was as follows:

Balance BalanceJuly 1, 2010 Additions Deductions June 30, 2011

Capital assets, not being depreciated:Land 1,475,734$ -$ -$ 1,475,734$

Capital assets, being depreciated:Land improvements 619,178 41,575 - 660,753 Buildings and improvements 37,487,569 20,278 - 37,507,847 Equipment 2,591,153 82,966 - 2,674,119 Vehicles 588,508 30,145 - 618,653

Total capital assets, being depreciated 41,286,408 174,964 - 41,461,372

Less accumulated depreciation:Land improvements 471,493 19,431 - 490,924 Buildings and improvements 13,553,732 960,150 - 14,513,882 Equipment 1,810,920 184,980 - 1,995,900 Vehicles 566,943 13,927 - 580,870

Total accumulated depreciation 16,403,088 1,178,488 - 17,581,576

Total capital assets, being depreciated, net 24,883,320 (1,003,524) - 23,879,796

Capital assets, net 26,359,054$ (1,003,524)$ -$ 25,355,530$

Depreciation Depreciation expense has been charged to functions as follows:

Instruction 903,058$ Support services 108,617 Community services 76,123 Athletics 65,058 Food services 25,632

1,178,488$


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NOTE E—BOND ISSUANCE COSTS Bond issuance cost activity for the year ended June 30, 2011 was as follows:

Balance BalanceJuly 1, 2010 Additions Deductions June 30, 2011

Bond issuance costs 398,504$ -$ -$ 398,504$ Less accumulated amortization 71,685 20,884 - 92,569

Bond issuance costs, net 326,819$ (20,884)$ -$ 305,935$

AmortizationAmortization expense has been charged as unallocated amortization.

NOTE F—INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS The composition of interfund balances as of June 30, 2011 is as follows:

Receivable fund Payable fund Amount

1999 Capital Projects Fund General Fund 5,075$ Other governmental funds General Fund 748,918

753,993$

The outstanding balances between funds result mainly from the time lag between the dates that (1) interfund

goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made.

Interfund Transfers

The General Fund transferred $65,313 to the Food Service Fund to finance operations and $209,993 to the 2007 Energy Conservation Bond Retirement Fund for debt service. The Energy Conservation Capital Projects Fund transferred $14,501 to the 2007 Energy Conservation Bond Retirement Fund for debt service.


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NOTE G—SHORT-TERM DEBT

The School District issues State of Michigan school aid anticipation notes to provide short-term operating funds. The notes are obligations of the General Fund, which received the note proceeds, and are backed by the full faith, credit and resources of the School District. The short-term debt activity for the year ended June 30, 2011 follows:

Balance Balance

July 1, 2010 Additions Reductions June 30, 2011State aid anticipation note

2009/2010 0.85% due August 2010 3,600,000$ -$ 3,600,000$ -$ 2009/2010 0.55% due August 2010 1,750,000 - 1,750,000 - 2010/2011 1.46% due August 2011 - 1,200,000 - 1,200,000 2010/2011 0.80% due August 2011 - 750,000 - 750,000 2010/2011 0.40% due August 2011 - 6,575,000 - 6,575,000

5,350,000$ 8,525,000$ 5,350,000$ 8,525,000$

NOTE H—LONG-TERM OBLIGATIONS The School District issues bonds, notes and other contractual commitments to provide for the acquisition,

construction and improvement of major capital facilities and for the acquisition of certain equipment. General obligation bonds are direct obligations and pledge the full faith and credit of the School District. Other long-term obligations include the School Bond Loan Fund, School Loan Revolving Fund and Education Interconnection and Consortium Financing Agreement.

The following is a summary of long-term obligations activity for the School District for the year ended

June 30, 2011:

Balance Balance Due withinJuly 1, 2010 Additions Reductions June 30, 2011 one year

Governmental activitiesBonds 24,174,939$ -$ 790,741$ 23,384,198$ 838,284$ Other obligations 3,080,514 150,090 4,391 3,226,213 4,391 Compensated absences 129,985 30,882 29,969 130,898 43,000 Early retirement obligations 237,000 33,000 74,000 196,000 48,000

27,622,438$ 213,972$ 899,101$ 26,937,309$ 933,675$

The additions for other obligations represent $126,744 of accrued interest on the School Bond Loan Fund and $23,346 of accrued interest on the School Loan Revolving Fund.


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NOTE H—LONG-TERM OBLIGATIONS—Continued

General obligation bonds consist of the following:

2006 General Obligation Refunding Bond

20,485,000$

Less issuance discount (95,736) Less deferred amount on refunding (263,171)

0% 2007 Energy Conservation Improvement Bonds

3,149,000

Durant obligations payable in annual installments

109,105

Total bonded debt 23,384,198

Other obligations

School Bond Loan Fund payable as soon as

2,577,624

School Loan Revolving Fund payable as soon as

639,805

Education Interconnection and Consortium Financing

8,784

Total other obligations 3,226,213

Compensated absences 130,898 Early retirement obligations 196,000

26,937,309$

annual tax collections exceed annual debt service payment requirements or May 2035, whichever is sooner; interest payable of $442,014 is included at interest rates ranging from 5.000% to 5.375%

Agreement payable in annual installments of $4,391 due March 2012 to 2013

payable in annual installments ranging from $785,000 to $1,580,000 due May 2012 to 2029; plus interest ranging from 3.5% to 5% payable semi-annually

requiring annual set aside principal installments of $209,933 unless a lesser amount will be sufficient to pay the bonds as they mature through December 2022.

of $58,479 including interest at 4.76% due May 2012 to 2013. The School District is only obligated to make the annual payments to the extent of annual State of Michigan state school aid appropriations.

annual tax collections exceed annual debt service payment requirements or May 2035, whichever is sooner; interest payable of $59,845 is included at interest rates ranging from 3.000% to 4.803%


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NOTE H—LONG-TERM OBLIGATIONS—Continued

The Durant bonds, including interest, were issued in anticipation of payment to the School District as appropriated and to be appropriated by the State of Michigan under Section 11g(3) of Act 94 (State Aid payments). The School District has pledged and assigned to the bondholder all rights to these State Aid payments as security for the Bond. The note receivable on the Statement of Net Assets is for the future appropriations from the State of Michigan to pay the Durant obligations.

The annual requirements of principal and interest to amortize the bonded debt, Education Interconnection and

Consortium Financing Agreement, and early retirement incentives outstanding as of June 30, 2011 follow:

Year endingJune 30, Principal Interest Total

2012 890,675$ 884,778$ 1,775,453$ 2013 914,214 852,803 1,767,017 2014 876,000 817,545 1,693,545 2015 912,000 775,295 1,687,295 2016 941,000 739,695 1,680,695

2017-2021 5,275,000 3,080,913 8,355,913 2022-2026 9,589,000 1,870,802 11,459,802 2027-2029 4,550,000 413,306 4,963,306

23,947,889$ 9,435,137$ 33,383,026$

NOTE I—EMPLOYEE BENEFITS Employee Retirement System – Defined Benefit Plan Plan description The School District contributes to the statewide Michigan Public School Employees’ Retirement System

(MPSERS), a cost sharing multiple-employer defined benefit pension plan administered by the twelve member board of the MPSERS. The MPSERS provides retirement benefits and post-retirement benefits for health, dental and vision. The MPSERS was established by Public Act 136 of 1945 and operated under the provisions of Public Act 300 of 1980, as amended. The MPSERS issues a publicly available financial report that includes financial statements and required supplementary information for MPSERS. That report may be obtained by writing to or calling:

Office of Retirement Systems Michigan Public School Employees Retirement System P.O. Box 30171 Lansing Michigan 48909-7671 1-800-381-5111


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NOTE I—EMPLOYEE BENEFITS—Continued

Employee Retirement System – Defined Benefit Plan –Continued Funding policy Member Investment Plan (MIP) members enrolled in MIP prior to January 1, 1990 contribute a permanently

fixed rate of 3.9 percent of gross wages. The MIP contribution rate was 4.0 percent from January 1, 1987, the effective date of the MIP, until January 1, 1990 when it was reduced to 3.9 percent. Members first hired between January 1, 1990 and June 30, 2008 and returning members who did not work between January 1, 1987 and December 31, 1989 contribute at the following graduated permanently fixed contribution rates: 3 percent of the first $5,000; 3.6 percent of $5,001 through $15,000; 4.3 percent of all wages over $15,000. Members first hired July 1, 2008, or later including Pension Plus Plan members, contribute at the following graduated permanently fixed contribution rates: 3 percent of the first $5,000; 3.6 percent of $5,001 through $15,000; 6.4 percent of all wages over $15,000.

Basic Plan members make no contributions. For a limited period ending December 31, 1992, an active Basic

Plan member could enroll in the MIP by paying the contributions that would have been made had enrollment occurred initially on January 1, 1987 or on the date of hire, plus interest. MIP contributions at the rate of 3.9 percent of gross wages begin at enrollment. Actuarial rate of interest is posted to member accounts on July 1st on all MIP monies on deposit for 12 months. If a member leaves MPSERS service and no pension is payable, the member’s accumulated contributions plus interest, if any, are refundable.

Public Act 75 of 2010 requires each actively employed member of MPSERS after June 30, 2010 to contribute 3 percent (or 1.5 percent) of their compensation to offset employer contributions for health care benefits of current retirees. For the school fiscal year that began July 1, 2010, members who were employed by a reporting unit and were paid less than $18,000 in the prior school fiscal year and members who were hired on or after July 1, 2010, with a starting salary less than $18,000 are required to contribute 1.5 percent of the member’s compensation. For each school fiscal year that begins on or after July 1, 2011, members shall contribute 3 percent of compensation into the health care funding account.

The School District is required to contribute the full actuarial funding contribution amount to fund pension benefits, plus an additional amount to fund retiree health care benefit amounts on a cash disbursement basis. The rates for the year ended June 30, 2011 ranged from 16.94 percent to 20.66 percent of payroll. The contribution requirements of plan members and the School District are established and may be amended by the MPSERS Board of Trustees. The School District contributions to MPSERS for the year ended June 30, 2011, 2010 and 2009 were approximately $2,082,000, $1,869,000, and $1,960,000 respectively, and were equal to the required contribution for those years.

The School District is not responsible for the payment of retirement benefits which is the responsibility of the

State of Michigan. Other post-employment benefits Under the MPSERS Act, all retirees have the option of continuing health, dental and vision coverage.


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NOTE I—EMPLOYEE BENEFITS—Continued

Employee Retirement System – Defined Contribution Plan Public Act 75 of 2010 established the Pension Plus Plan which provides all individuals hired on or after July 1, 2010, with a combined Defined Benefit and Defined Contribution benefit structure. Any member of MPSERS who became a member of MPSERS on or after July 1, 2010 is a Pension Plus member. The plan is administered by the MPSERS Board of Trustees and the contribution requirements of plan members and the School District are established and may be amended by the MPSERS Board of Trustees. Employees under the Pension Plus Plan are automatically enrolled in the defined contribution component of the plan with a default employee contribution rate of 2 percent of the employee’s pay. Employees may increase their personal contribution up to the annual IRS limit or can elect out of contributing. The School District is required to match 50 percent of the employee contribution up to 1 percent of the employee’s pay. For the year ended June 30, 2011, School District and employee contributions were approximately $200 and $400, respectively.

NOTE J—POST-EMPLOYMENT HEALTH CARE PLAN Plan Description. Pursuant to employment contracts, certain retired employees who elected early retirement

are eligible to receive post-retirement health insurance benefits through the Muskegon Heights Public Schools Retiree Medical Plan (Plan), a single employer defined benefit postemployment healthcare plan administered by the School District. Benefits terminate the month the person attains eligibility for full social security benefits, or dies, whichever occurs first; however, no more than ten (10) years of payments will be made. Future retirees' benefits will terminate June 30, 2012.

Funding Policy. Retirees are not required to contribute to the Plan. The School District funds the Plan on a

pay-as-you-go basis. The annual cost of these benefits per retiree ranged from $3,000 to $28,000, provided to approximately 67 participants. Annual OPEB Cost and Net OPEB Obligation. The School District's annual other post-employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the School District's annual OPEB cost for the year, the amount actually contributed to the Plan, and changes in the School District's net OPEB obligation to the Plan.

Annual required contribution 636,081$ Interest on net OPEB obligation - Adjustment to annual required contribution - Annual OPEB cost (expense) 636,081 Contributions made 636,081 Increase in net OPEB obligation - Net OPEB obligation - beginning of year - Net OPEB obligation - end of year -$


June 30, 2011

26

NOTE J—POST-EMPLOYMENT HEALTH CARE PLAN— Continued Annual OPEB Cost and Net OPEB Obligation.—Continued The School District's annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for the year ended June 30, 2011 is as follows:

Year endedAnnual

OPEB Cost

Percentage of Annual OPEB

Cost Contributed

Net OPEB Obligation

6/30/09 557,317$ 100 % -$ 6/30/10 669,770 100 - 6/30/11 636,081 100 -

Funded Status and Progress. The funded status of the Plan as of July 1, 2008 (the most recent valuation date), was as follows:

Actuarial accrued liability (AAL) 3,569,097$ Actuarial value of plan assets - Unfunded actuarial accrued liability 3,569,097$

Funded ratio (actuarial value of plan assets/AAL) 0 %

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the health care cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and Plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of Plan members not contributing to the Plan. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The required contribution was determined as part of the July 1, 2008 actuarial valuation using the Projected Unit Credit (level dollar) actuarial cost method. The actuarial assumptions included 4 percent discount rate, which assumes a 10% percent inflation assumption starting in 2009 graded to 5% in 2014. The Plan’s unfunded actuarial accrued liability is being amortized as a level dollar on a closed basis. The remaining amortization period at June 30, 2011 is 2 years.


June 30, 2011

27

NOTE K—COMMITMENTS AND CONTINGENCIES

Operating Leases The School District has lease agreements expiring at various dates through February 2014. Expense for the year ended June 30, 2011 was approximately $61,000. The following is a schedule of future minimum rental payments required under operating leases for School District office equipment.

Year endingJune 30, Amount

2012 122,264$ 2013 23,264 2014 2,598

148,126$

Grant Programs The School District participates in grant programs, which are subject to program compliance audits by the grantor or its representatives. Such audits of these programs may be performed at some future date. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time although the School District expects such amounts, if any, to be immaterial.

NOTE L—OTHER INFORMATION

Risk Management The School District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; error and omissions; injuries to employees; and natural disasters. The School District participates in two distinct pools of educational institutions within the State of Michigan for self-insuring property and casualty and workers’ disability compensation. The pools are considered public entity risk pools. The School District pays annual premiums under a retrospectively rated policy to the pools for the respective insurance coverage. In the event a pool’s total claims and expenses for a policy year exceed the total normal annual premiums for said years, all members of the specific pool’s policy year may be subject to special assessment to make up the deficiency. The workers’ compensation pool and the property casualty pool maintain reinsurance for claims generally in excess of $500,000 for each occurrence with the overall maximum coverage varying depending on the specific type coverage of reinsurance.

The School District continues to carry commercial insurance for other risks of loss, including employee health

and accident insurance. No settlements have occurred in excess of coverage for June 30, 2011 or any of the prior three years.

Related Party Transactions The School District contracted with an Organization in which a school board member is also a board member of the Organization to provide services totaling approximately $7,000 during the year. The School District paid approximately $17,000 for professional services to a family member of a School District employee.


June 30, 2011

28

NOTE M—SUBSEQUENT EVENTS

In August 2011, the School District received the proceeds of a $7,878,000 State of Michigan (State) school aid anticipation note payable. The note payable is not subject to redemption prior to their maturity in August 2011 and bears interest at the rate of 0.31 per annum. The School District pledged for payment of the note payable, the amount of state school aid to be received plus the full faith, credit, and resources of the School District.

In August 2011, the School District terminated one of the operating leases disclosed in Note K and entered into a 60-month capital lease requiring monthly payments of $9,266.

NOTE N—PRIOR PERIOD ADJUSTMENT On July 1, 2010, the School District adopted Governmental Accounting Standards Board (GASB) Statement

54—Fund Balance Reporting and Governmental Fund Type Definitions. Under GASB 54, the Athletics Fund no longer qualifies as a special revenue fund type and all athletics revenues and expenditures are reported in the General Fund. The June 30, 2010 Athletics Fund fund deficit is required to be reclassified to the General Fund. The School District's restated General Fund and Other governmental funds beginning fund balances (deficits) are as follows:

Other governmental General Fund funds Beginning fund balance (deficit) $ (3,935,660) $ 55,056 Reclassification of Athletics Fund fund deficit (260,204) 260,204

Beginning fund balance (deficit), as restated $ (4,195,864) $ 315,260

REQUIRED SUPPLEMENTARY INFORMATION

School District of the City of Muskegon Heights REQUIRED SUPPLEMENTARY INFORMATION

BUDGETARY COMPARISON SCHEDULE General Fund

For the year ended June 30, 2011

30

Variance withfinal budget-

positiveOriginal Final Actual (negative)

REVENUESLocal sources 2,570,190$ 2,605,313$ 2,400,077$ (205,236)$ State sources 12,261,530 11,975,256 12,015,636 40,380 Federal sources 4,911,380 5,426,895 3,368,856 (2,058,039)

Total revenues 19,743,100 20,007,464 17,784,569 (2,222,895)

EXPENDITURESInstruction

Basic programs 7,933,880 7,377,180 7,758,821 (381,641) Added needs 4,450,740 4,039,320 3,689,744 349,576 Adult and continuing education 61,310 132,090 109,252 22,838

Support servicesPupil 1,738,060 1,606,600 1,576,280 30,320 Instructional staff 1,363,120 1,247,680 1,324,921 (77,241) General administration 445,890 447,460 532,970 (85,510) School administration 915,160 978,310 940,166 38,144 Business 812,440 626,630 685,320 (58,690) Operations and maintenance 2,174,750 2,153,600 2,295,557 (141,957) Pupil transportation services 908,850 882,630 840,936 41,694 Central 594,270 511,180 530,176 (18,996) Athletics 265,220 265,220 292,526 (27,306)

Community services 1,351,080 1,343,040 1,209,273 133,767 Outgoing transfers and other transactions 215,690 339,497 275,306 64,191

Total expenditures 23,230,460 21,950,437 22,061,248 (110,811)

Excess (deficiency) of revenues over (under) expenditures (3,487,360)$ (1,942,973)$ (4,276,679) (2,333,706)$

Fund balance at beginning of year, as restated (4,195,864)

Fund balance at end of year (8,472,543)$

Budgeted amounts

School District of the City of Muskegon Heights REQUIRED SUPPLEMENTARY INFORMATION

SCHEDULE OF FUNDING PROGRESS RETIREE MEDICAL PLAN


31

Actuarial UAAL as aActuarial accrued Unfunded percentage

Actuarial value of liability AAL Funded Covered of coveredvaluation assets (AAL) (UAAL) ratio payroll payroll

date (a) (b) (b-a) (a/b) (c) [(b-a)/c]

7/1/2008 -$ 3,569,097$ 3,569,097$ - N/A N/A

Factors Significantly Affecting Trends1. Assumption or method changes - first GASB 45 report issued.

N/A-not applicable.

School District of the City of Muskegon Heights SINGLE AUDIT OF FEDERAL

FINANCIAL ASSISTANCE PROGRAMS

Financial Report and Independent Auditors’ Reports

June 30, 2011

C O N T E N T S FINANCIAL REPORT AND INDEPENDENT AUDITORS’ REPORTS INTERNAL CONTROL AND COMPLIANCE REPORTS INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS .................................................................................. 3 INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 .......................... 5 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS ............................................................ 8 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS ...................................... 12 SCHEDULE OF FINDINGS AND RESPONSES ............................................................................... 13 CLIENT DOCUMENTS SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS ................................................................ 25 CORRECTIVE ACTION PLAN .......................................................................................................... 29


3


INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHERS MATTERS

BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

December 28, 2011 Board of Education School District of the City of Muskegon Heights Muskegon Heights, Michigan We have audited the financial statements of the School District of the City of Muskegon Heights as of and for the year ended June 30, 2011 and have issued our report thereon dated December 28, 2011. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the School District of the City of Muskegon Heights’ internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the School District of the City of Muskegon Heights’ internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the School District of the City of Muskegon Heights’ internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as described in the accompanying Schedule of Findings and Responses, we identified certain deficiencies in internal control over financial reporting that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying Schedule of Findings and Responses to be material weaknesses, as Findings 2011-2, 2011-3 and 2011-4. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies described in the accompanying Schedule of Findings and Responses to be significant deficiencies, as Findings 2011-1, 2011-5, 2011-6 and 2011-7.

BRICKLEY DELONG

4

Board of Education December 28, 2011 Page 2 Compliance and Other Matters As part of obtaining reasonable assurance about whether the School District of the City of Muskegon Heights’ financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed one instance of noncompliance or other matter that is required to be reported under Government Auditing Standards and which is described as Finding 2011-1 in Section II of the accompanying Schedule of Findings and Responses. The School District of the City of Muskegon Heights’ responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses. We did not audit the School District of the City of Muskegon Heights’ responses and, accordingly, we express no opinion on them. This report is intended solely for the information and use of the Board of Education, management, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.


5 678 Front Ave., NW Suite 230 316 Morris Ave., Suite 500, P.O. Box 999 907 S. State St., P.O. Box 331 Grand Rapids, MI 49504 Muskegon, MI 49443 Hart, MI 49420 PHONE (616) 742-1300 PHONE (231) 726-5800 PHONE (231) 873-1040 FAX (616) 742-1318 FAX (231) 722-0260 FAX (231) 873-0602 www.brickleydelong.com

INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR

PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133

December 28, 2011 Board of Education School District of the City of Muskegon Heights Muskegon Heights, Michigan Compliance We have audited the School District of the City of Muskegon Heights' compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of the School District of the City of Muskegon Heights’ major federal programs for the year ended June 30, 2011. The School District of the City of Muskegon Heights’ major federal programs are identified in the Summary of Auditors’ Results section of the accompanying Schedule of Findings and Responses. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the School District of the City of Muskegon Heights’ management. Our responsibility is to express an opinion on the School District of the City of Muskegon Heights’ compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the School District of the City of Muskegon Heights’ compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the School District of the City of Muskegon Heights’ compliance with those requirements. As described in Findings 2011-1, 2011-8 and 2011-9 in Section III of the accompanying Schedule of Findings and Responses, the School District of the City of Muskegon Heights did not comply with requirements regarding suspension and debarment, allowable costs/cost principles and eligibility compliance requirements that are applicable to its U.S. Department of Education Title I, Part A Cluster and Special Education Cluster and U.S. Department of Health and Human Services TANF program. Compliance with such requirements is necessary, in our opinion, for the School District of the City of Muskegon Heights to comply with requirements applicable to those programs.

BRICKLEY DELONG

6

Board of Education December 28, 2011 Page 2 Compliance—Continued In our opinion, except for noncompliance described in the preceding paragraph, the School District of the City of Muskegon Heights complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2011. The results of our auditing procedures also disclosed other instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described as Findings 2011-10 and 2011-11 in Section III of the accompanying Schedule of Findings and Responses. Internal Control Over Compliance Management of the School District of the City of Muskegon Heights is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the School District of the City of Muskegon Heights’ internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the School District of the City of Muskegon Heights’ internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over compliance that we consider to be significant deficiencies as described in the accompanying Schedule of Findings and Responses, as Findings 2011-1, 2011-8, 2011-9, 2011-10 and 2011-11. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. The School District of the City of Muskegon Heights’ responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses. We did not audit the School District of the City of Muskegon Heights’ responses and, accordingly, we express no opinion on them.

BRICKLEY DELONG

7

Board of Education December 28, 2011 Page 3 Schedule of Expenditures of Federal Awards We have audited the financial statements of the School District of the City of Muskegon Heights as of and for the year ended June 30, 2011, and have issued our report thereon dated December 28, 2011, which contained an unqualified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements. The Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. This report is intended solely for the information and use of the Board of Education, management, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

School District of the City of Muskegon Heights SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS


8

Cash/Accrued payments Expenditures

Federal Program or (deferred) in kind (accrual basis)Federal grantor/pass-through CFDA award revenue received Prior Current grantor/program title number amount July 1, 2010 (cash basis) year (s) year Total Notes

U.S. Department of EducationPassed through Michigan Department of Education

Title I ClusterTitle I 84.010

091530 0809 2,495,055$ -$ (70,782)$ 2,115,849$ -$ 2,115,849$ 70,782$ 3 101530 0910 2,335,518 295,123 439,981 1,830,917 144,858 1,975,775 - 101550 0910 23,000 14,552 16,371 14,552 1,819 16,371 - 111530 1011 2,437,660 - 781,293 - 1,279,086 1,279,086 497,793 111550 1011 60,000 - - - 8,163 8,163 8,163

7,351,233 309,675 1,166,863 3,961,318 1,433,926 5,395,244 576,738 ARRA-Title I, Part A 84.389

101535 0910 1,232,175 174,425 255,376 620,596 29,256 649,852 (51,695) 101555 0910 179,221 - - - 73,557 73,557 73,557 111535 1011 530,163 - 2,329 - 111,987 111,987 109,658

1,941,559 174,425 257,705 620,596 214,800 835,396 131,520 Total Title I Cluster 9,292,792 484,100 1,424,568 4,581,914 1,648,726 6,230,640 708,258

Title II A 84.367100520 0910 355,017 31,157 129,958 188,274 98,801 287,075 - 110520 1011 361,011 - - - 91,707 91,707 91,707

716,028 31,157 129,958 188,274 190,508 378,782 91,707

ARRA-Title II, Part D 84.386104295 0910 43,018 13,220 14,903 32,863 1,683 34,546 - 114295 1011 8,561 - - - 3,360 3,360 3,360

51,579 13,220 14,903 32,863 5,043 37,906 3,360

ARRA-Education Stabilization Fund 84.394112525 1011 185,733 - 185,733 - 185,733 185,733 -

Education Jobs Fund 84.410112545 1011 292,039 - 292,039 - 292,039 292,039 -

Total passed through MichiganDepartment of Education 10,538,171 528,477 2,047,201 4,803,051 2,322,049 7,125,100 803,325

Passed through Muskegon Area Intermediate School DistrictAdult Basic Education 84.002

101130-101587 27,756 27,756 27,756 27,756 - 27,756 - 111130-101587 26,884 - - - 26,884 26,884 26,884

54,640 27,756 27,756 27,756 26,884 54,640 26,884

(deferred)revenue

June 30, 2011

Accrued

School District of the City of Muskegon Heights SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS—CONTINUED


9



U.S. Department of Education—ContinuedPassed through Muskegon Area Intermediate School District—Continued

Special Education ClusterIDEA 101-476 Flowthrough 84.027

100450 0910 480,368$ 134,654$ 134,654$ 480,368$ -$ 480,368$ -$ 110450 1011 464,613 - 438,038 - 464,613 464,613 26,575

944,981 134,654 572,692 480,368 464,613 944,981 26,575 IDEA 101-476 Preschool 84.173

090460 0809 10,503 (983) - 9,520 983 10,503 - 110460 1011 25,022 - 21,228 - 25,022 25,022 3,794

35,525 (983) 21,228 9,520 26,005 35,525 3,794 ARRA - IDEA Preschool 84.392

100465 0910 20,385 20,385 20,385 20,385 - 20,385 - Total Special Education Cluster 1,000,891 154,056 614,305 510,273 490,618 1,000,891 30,369

Drug Free Schools and Communities Act 84.186102860 0910 24,411 24,411 24,411 24,411 - 24,411 -

Total passed through Muskegon Area Intermediate School District 1,079,942 206,223 666,472 562,440 517,502 1,079,942 57,253 Total U.S. Department of Education 11,618,113 734,700 2,713,673 5,365,491 2,839,551 8,205,042 860,578

U.S. Department of AgriculturePassed through Michigan Department of Education

Child Nutrition Cluster101970 Breakfast 10.553 241,051 - 19,887 221,164 19,887 241,051 - 111970 Breakfast 248,231 - 236,599 - 248,231 248,231 11,632

489,282 - 256,486 221,164 268,118 489,282 11,632

101950 All Lunches 10.555 59,478 - 6,137 53,341 6,137 59,478 - 111950 All Lunches 52,183 - 50,016 - 52,183 52,183 2,167 101960 Free and Reduced 508,867 - 42,272 466,595 42,272 508,867 - 111960 Free and Reduced 443,952 - 425,120 - 443,952 443,952 18,832 111980 Snack Program 2,157 - 2,157 - 2,157 2,157 - Entitlement Commodities 56,601 - 56,601 - 56,601 56,601 - Bonus Commodities 1,353 - 1,353 - 1,353 1,353 -

1,124,591 - 583,656 519,936 604,655 1,124,591 20,999 Summer Food Service Program for Children 10.559

100900 Summer Food Meals 104,876 23,288 104,876 23,288 81,588 104,876 - 101900 Summer Food Sponsor Admin 8,875 1,968 8,875 1,968 6,907 8,875 - 110900 Summer Food Meals 12,231 - - - 12,231 12,231 12,231 111900 Summer Food Sponsor Admin 1,036 - - - 1,036 1,036 1,036

127,018 25,256 113,751 25,256 101,762 127,018 13,267 Total Child Nutrition Cluster 1,740,891 25,256 953,893 766,356 974,535 1,740,891 45,898

(deferred)revenue

June 30, 2011

Accrued



10



U.S. Department of Agriculture—ContinuedPassed through Michigan Department of Education—Continued

Child Care Food Program 10.558101920 CCFP Meals 17,684$ -$ 2,815$ 14,869$ 2,815$ 17,684$ -$ 102010 Child Care Cash in Lieu 668 - 117 551 117 668 - 111920 CCFP Meals 5,992 - 4,322 - 5,992 5,992 1,670 112010 Child Care Cash in Lieu 446 - 322 - 446 446 124

24,790 - 7,576 15,420 9,370 24,790 1,794 Fresh Fruit and Vegetable Program 10.582

110950 6,163 - - - 6,163 6,163 6,163

Total passed through Michigan Department of Education 1,771,844 25,256 961,469 781,776 990,068 1,771,844 53,855

Passed through County of Muskegon, MichiganSupplemental Nutrition Assistance Program 10.561

FY11 Food Assistance 23,517 - 3,024 - 6,889 6,889 3,865

Total U.S. Department of Agriculture 1,795,361 25,256 964,493 781,776 996,957 1,778,733 57,720

U.S. Department of LaborPassed through County of Muskegon, Michigan

Wagner Peyser Labor Exchange 17.207402222/WP-09 23,127 11,565 11,565 23,127 - 23,127 - 402222/WP-10 2,943 - 2,943 - 2,943 2,943 - 402222/REI-ARRA-REEMPLOYMENT 18,178 8,165 10,018 16,325 1,853 18,178 - 402222/ES-ARRA-WP-ECAR 519 - 469 50 469 519 -

44,767 19,730 24,995 39,502 5,265 44,767 - Workforce Investment Act Cluster

WIA Adult Program 17.258402222/WIA-09 39,219 20,599 20,599 39,219 - 39,219 - 402222/WIA-10 18,098 - 13,066 - 18,098 18,098 5,032 402222/WIA-ARRA 6,065 2,801 2,801 6,065 - 6,065 -

63,382 23,400 36,466 45,284 18,098 63,382 5,032

WIA Youth Program 17.259402222/WIA-09 16,238 1,731 1,731 16,238 - 16,238 - 402222/WIA-10 23,542 - 16,996 - 23,542 23,542 6,546 402222/WIA-ARRA 44,298 10,923 10,923 44,298 - 44,298 -

84,078 12,654 29,650 60,536 23,542 84,078 6,546

revenueJune 30, 2011

Accrued(deferred)



11



U.S. Department of Labor—ContinuedPassed through County of Muskegon, Michigan—Continued

Workforce Investment Act Cluster—ContinuedWIA Dislocated Workers 17.260

402222/WIA-09 25,197$ 11,732$ 11,732$ 25,197$ -$ 25,197$ -$ 402222/WIA-10 8,242 - 5,951 - 8,242 8,242 2,291 402222/WIA-ARRA 15,765 7,280 7,280 15,765 - 15,765 -

49,204 19,012 24,963 40,962 8,242 49,204 2,291 Total Workforce Investment Act Cluster 196,664 55,066 91,079 146,782 49,882 196,664 13,869

Total passed through County of Muskegon, Michiganand U.S. Department of Labor 241,431 74,796 116,074 186,284 55,147 241,431 13,869

U.S. Department of Health and Human ServicesPassed through County of Muskegon, Michigan

Temporary Assistance for Needy Families 93.558402222 FY10 JET-TANF 344,432 173,848 173,848 344,432 - 344,432 - 402222 FY11 JET-TANF 337,134 - 213,006 - 337,134 337,134 124,128

681,566 173,848 386,854 344,432 337,134 681,566 124,128 Passed through Muskegon Area Intermediate School District

Head Start ClusterHead Start 93.600

05CH8258/11 649,969 27,182 299,325 377,826 272,143 649,969 - 05CH8258/12 345,714 - 158,741 - 345,714 345,714 186,973

995,683 27,182 458,066 377,826 617,857 995,683 186,973 ARRA-Head Start Quality Improvement 93.708

05SE8258/01 29,566 13,283 23,475 19,374 10,192 29,566 -

ARRA-Early Head Start 93.70905SA8258/01 34,694 10,361 23,792 21,263 9,407 30,670 (4,024) 05SA8258/02 44,456 - 27,843 - 44,456 44,456 16,613

79,150 10,361 51,635 21,263 53,863 75,126 12,589 Total Head Start Cluster 1,104,399 50,826 533,176 418,463 681,912 1,100,375 199,562

Medical Assistance Program Title XIX 93.778393 2,918 - 2,918 - 2,918 2,918 -

Total passed through Muskegon AreaIntermediate School District 1,107,317 50,826 536,094 418,463 684,830 1,103,293 199,562

Total U.S. Department of Healthand Human Services 1,788,883 224,674 922,948 762,895 1,021,964 1,784,859 323,690

TOTAL FEDERAL ASSISTANCE 15,443,788$ 1,059,426$ 4,717,188$ 7,096,446$ 4,913,619$ 12,010,065$ 1,255,857$

revenueJune 30, 2011

Accrued(deferred)

The accompanying notes are an integral part of this schedule.

School District of the City of Muskegon Heights NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS


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1.

2.

3.

4.

Revenues from federal sources per June 30, 2011Governmental Funds financial statements

General Fund 3,368,856$ Other governmental funds (includes Food Service Fund) 983,904 4,352,760$

Plus:Expenditures reported on SEFA as of June 30, 2011, however,the corresponding revenue is deferred in the governmentalfunds financial statements under GASB 33. 441,521

June 30, 2011 single audit questioned costs removed fromfinancial statement federal revenues while awaiting managementdecisions from pass-through entities. 305,608

IDEA current year expense recognized as revenue in prior year. 983

Rounding 1

Less:Expenditures reported on SEFA as of June 30, 2010, however,the corresponding revenue was deferred in the governmentalfunds financial statements under GASB 33. (134,098)

WIA and TANF local match recorded as federal revenue (53,156)

Expenditures per single audit reportSchedule of Expenditures of Federal Awards 4,913,619$

Please see the financial statement footnotes for the significant accounting policies used in preparing this schedule.

Management has utilized the CMS Grant Auditor Report in preparing the Schedule of Expenditures of Federal Awards (SEFA).

Reconciliation of revenues from federal sources per governmental funds financial statements and expenditures per single audit report Schedule of Expenditures of Federal Awards.

The Michigan Department of Education determined Muskegon Heights Public Schools was not in compliance with certain requirements, noted in Findings 2010-1, 2010-2 and 2010-3 in the June 30, 2010 single audit, related to Suspension and Debarment, Eligibility, and Allowable Costs/Cost Principles and the Michigan Department of Education took the funds back.

School District of the City of Muskegon Heights SCHEDULE OF FINDINGS AND RESPONSES


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SECTION I—SUMMARY OF AUDITORS’ RESULTS

A. Financial Statements

1. Type of auditors' report issued: Unqualified

2. Internal control over financial reporting:

• Material weakness(es) identified? X yes no

• Significant deficiency(ies) identified that are not considered to be material weaknesses? X yes none reported

3. Noncompliance material to financial statements noted? X yes no

B. Federal Awards

1. Internal control over major programs:

• Material weakness(es) identified? yes X no

• Significant deficiency(ies) identified that are not considered to be material weaknesses? X yes none reported

2. Type of auditors' report issued on compliance for major programs:

CFDA Number(s) Name of Federal Program/Cluster Type of Auditors’ Report

U.S. Department of Agriculture 10.553, 10.555 and 10.559 Child Nutrition Cluster Unqualified

U.S. Department of Education 84.010 and 84.389 Title I, Part A Cluster Qualified 84.027 and 84.173 Special Education Cluster Qualified

U.S. Department of Health and Human Services 93.558 TANF Qualified 93.600, 93.708 and 93.709 Head Start Cluster Unqualified

3. Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMB Circular A-133? X yes no

4. Identification of major programs:

CFDA Number(s) Name of Federal Program/Cluster

U.S. Department of Agriculture 10.553, 10.555 and 10.559 Child Nutrition Cluster

U.S. Department of Education 84.010 and 84.389 Title I, Part A Cluster 84.027 and 84.173 Special Education Cluster

U.S. Department of Health and Human Services 93.558 TANF 93.600, 93.708 and 93.709 Head Start Cluster

5. Dollar threshold used to distinguish between type A and type B programs: $300,000

6. Auditee qualified as low-risk auditee? yes X no



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SECTION II – FINANCIAL STATEMENT FINDINGS Finding 2011-1: Suspension and Debarment Compliance U.S. Department of Education Title I, Part A Cluster Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389 Award Numbers: 1115301011 and 10155550910 Award Year Ends: September 30, 2011 Special Education Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 84.027 Award Numbers: 1104501011 Award Year Ends: September 30, 2011 U.S. Department of Health and Human Services Temporary Assistance for Needy Families (TANF) Pass-through entity: County of Muskegon CFDA: 93.558 Award Numbers: 402222 JET-TANF Award Year Ends: June 30, 2011 Specific Requirement: Suspension and Debarment Criteria: Per 2 CFR section 180, Non-federal entities are prohibited from contracting with or making

subawards under covered transactions to parties that are suspended or debarred or whose principals are suspended or debarred. “Covered transactions” include those procurement contracts for goods and services that are expected to equal or exceed $25,000 or meet certain other specified criteria. The non-federal entity must verify that the entity is not suspended or debarred or otherwise excluded. This verification may be accomplished by checking the Excluded Parties List System (EPLS) maintained by the General Services Administration (GSA), collecting a certification from the entity, or adding a clause or condition to the covered transaction with that entity.

Condition: We noted that the documentation of the School District’s verification checks of the EPLS was

missing for all transactions, for which we tested with vendors contracted for services greater than $25,000. Cause: The School District’s procedures require the Human Resources Office to perform EPLS checks on

all new vendors to the accounting system. During fiscal 2010-11, the Human Resource Office also performed checks on existing vendors. The School District’s established procedures provide that the EPLS results screen is printed and bound in a three-ring binder maintained in the Human Resource Office. That three-ring binder was taken as evidence by the Michigan State Police in March 2011, and School District officials stated that it has not yet been returned to the School District. Therefore, we could not perform audit tests on the three-ring binder’s supporting documentation to determine whether the appropriate EPLS checks were performed by School District personnel for the vendors identified.



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SECTION II – FINANCIAL STATEMENT FINDINGS—CONTINUED Finding 2011-1: Suspension and Debarment Compliance—Continued Questioned Costs: In lieu of performing audit tests on documentation in the three-ring binder, we verified

each vendor selected for testing against the EPLS. The selected vendors and its principals were not found to be suspended or debarred. The amounts paid to the selected vendors by federal program are as follows:

Program Number of vendors Amount Title I, Part A 1 $ 76,353 Special Education Cluster 3 145,701 TANF 1 37,061 $259,115 Context: We selected for testing all five vendors we identified as contracted for greater than $25,000 to a federal grant we were auditing as a major program. Effect: The School District could have contracted with a vendor that is suspended or debarred or whose principals are suspended or debarred. Recommendation: The School District should follow its established procedures to ensure compliance with suspension and debarment requirements.

Views of Responsible Officials and Planned Corrective Actions: The relevant documentation in regard to this

issue is in possession of the Michigan State Police. The vendors and principals in question have not been suspended or debarred as indicated by the EPLS system. These vendors were also specifically tested for suspension and debarment in both 2010/11 and the beginning of 2011/12 by an independent CPA firm prior to the School District requesting reimbursement of those funds as required by the Michigan Department of Education. The results of those tests produced no findings. Muskegon Heights Public Schools is currently updating its policies and procedures to address this potential issue moving forward.

Finding 2011-2: MATERIAL WEAKNESS—Procedures for Budgeting Act Compliance and Deficit

Reduction Plan Compliance Criteria: Per the Michigan Uniform Budgeting and Accounting Act, Section 18(3), “An administrative

officer of the local unit shall not incur expenditures against an appropriation account in excess of the amount appropriated by the legislative body.”

Condition: The School District did not comply with provisions of the aforementioned Michigan budgeting

act, and also the School District did not comply with its deficit elimination plan filed with the State of Michigan. Both conditions are reported in this finding, since they are closely related to each other.

Cause: During the year ended June 30, 2011, School District management authorized and executed expenditures in excess of the Board of Education’s budgetary appropriations.



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SECTION II – FINANCIAL STATEMENT FINDINGS—CONTINUED Finding 2011-2: MATERIAL WEAKNESS—Procedures for Budgeting Act Compliance and Deficit

Reduction Plan—Continued Effect: The School District was not in compliance with its authorized budgetary appropriations and,

correspondingly, did not comply with its deficit reduction plan filed with the State of Michigan. Recommendation: The School District should establish policies and internal controls which will ensure

administrative compliance with the Michigan Uniform Budgeting and Accounting Act, the Board of Education’s approved budgetary appropriations, and the deficit reduction plan filed with the State of Michigan.

Views of Responsible Officials and Planned Corrective Actions: The fund balance deficit increased due to greater than projected general fund instructional costs, general administration costs, utility costs, and state aid note interest costs. In addition, there were numerous federal program cost disallowances that were absorbed by the general fund. Deferred revenue related to unclaimed allowable federal costs was equal to $441,521, and an additional $305,608 is currently listed as a contingent liability subject to review by pass-through entities. Finding 2011-3: MATERIAL WEAKNESS—General Ledger Account Balance Reconciliations Criteria: General ledger account balances should be reconciled to detailed supporting documentation on a timely basis. Condition: There were material account balances including accrued health insurance, accrued retirement, accrued workman’s compensation and accounts payable that were not reconciled to supporting documentation on a timely basis during the year ended June 30, 2011. Cause: Business Office staff positions had been reduced, creating periods of time in which account balances were not reconciled timely. Effect: Failure to reconcile general ledger account balances timely can adversely affect the accuracy of internally-prepared monthly financial statements, and, correspondingly, adversely affect the analysis and conclusions as to the School District’s financial position and results of operations by management and other users of such monthly financial statements. Additionally, this condition significantly increases the amount of year end general ledger account analysis and adjusting journal entries by School District personnel, causing significant delays in closing fiscal year financial records and issuing audited financial statements. Recommendation: The utilization of a monthly closing checklist and written procedures would encourage personnel to review the accuracy of month end balances through analysis of account activity, comparison to supporting documentation and/or reconciliation with detailed schedules.

Views of Responsible Officials and Planned Corrective Actions: General ledger account balances will be reconciled quarterly. Appropriate schedules will be maintained by the preparer.



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SECTION II – FINANCIAL STATEMENT FINDINGS—CONTINUED

Finding 2011-4: MATERIAL WEAKNESS—Cash Disbursement Check Release Procedures Criteria: All vendor and payroll withholding cash disbursement checks should be mailed timely after preparation. Condition: During our tests of bank reconciliations and other documents, we noted several vendor and payroll withholding cash disbursement checks listed as outstanding on the year end bank account reconciliations had not been released to check payees, as such checks were being held by School District personnel. Cause: Checks were held due to cash flow limitations. Effect: Since the School District’s accounting software records cash disbursement checks prepared as reductions of bank account balances, trade accounts payable balances, and payroll-related liability balances, interim and year-end internally-prepared financial statements are not accurate, since cash and the associated liabilities are understated by the amount of the checks being held and not released. Further, cash disbursement checks being held could be stolen or misplaced, increasing the opportunity for School District funds to be misappropriated. Recommendation: The School District should follow established internal control procedures over the preparation and mailing of vendor and payroll withholding cash disbursement checks. Views of Responsible Officials and Planned Corrective Actions: The district will submit checks to vendors within one week of processing. Checks will no longer be held by the district.

Finding 2011-5: Procedures for Timely Deposit and Posting of Cash Receipt Transactions Criteria: All cash receipt transactions should be deposited and posted to the general ledger timely. Condition: We noted that cash receipts are not always deposited and posted to the general ledger timely, since the conversion to a new accounting software on July 1, 2011. Cause: Business Office staff positions had been reduced, creating periods of time in which cash receipts transactions were not deposited and posted to the general ledger timely. Effect: Financial accounting records and associated interim financial statements do not accurately report cash receipts and account balances. Recommendation: The School District personnel should comply with established internal control procedures over the timely depositing and posting of cash receipt transactions to the general ledger. Views of Responsible Officials and Planned Corrective Actions: Cash receipts will be deposited into the district bank account on Tuesdays and Fridays. They will be recorded to the ledger on the next Monday following bank deposit. EFT wires will be posted to the ledger by the 15th day of the following month, coinciding with the bank reconciliation schedule.



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SECTION II – FINANCIAL STATEMENT FINDINGS—CONTINUED Finding 2011-6: Accounts Payable Cut-off Procedures Criteria: The School District should have adequate accounts payable cut-off procedures to ensure that all

associated expenditures are reported in the proper period.

Condition: During our year end audit test of accounts payable cut-off, we noted several open purchase orders as of June 30, 2011, were recorded as accounts payable in the wrong fiscal accounting period.

Cause: School District personnel incorrectly recorded the open purchase orders as accounts payable as of June 30, 2011, even though the goods had not been received by June 30, 2011.

Effect: Expenditures and accounts payable were overstated.

Recommendation: The School District should improve the effectiveness of its established accounts payable cut-off procedures, including staff training to improve the accounts payable cut-off to help ensure expenditures are reported in the proper period. Views of Responsible Officials and Planned Corrective Actions: Goods received within the reporting year will be recorded to accounts payable. Goods not received by June 30 will be recorded in the next fiscal year.

Finding 2011-7: Procedures for the Establishment of Authorized Bank Accounts Criteria: New School District bank accounts should be established only as authorized in accordance with

School District policy.

Condition: During our year end audit testing of cash balances, we confirmed the year end bank account balances with the School District’s bank. We noted a new account on the confirmation received from the bank. Business Office personnel had no knowledge of the existence of this account.

Cause: A School District employee within the Athletic Department established an unauthorized checking account for the Athletic Department, because the employee wanted to be able to pay vendor bills without waiting for expenditure requests to be processed by the Business Office within its established procedures and internal controls.

Effect: None of the cash receipts or cash disbursements processed through the checking account were recorded in the School District’s financial records. Therefore, such transactions were not included in the School District’s internally-prepared financial statements. This condition also enabled the individual to bypass the internal controls as established by the School District and reduced the opportunity for School District personnel to prevent unauthorized transactions.

Recommendation: The School District should notify its banking institutions to only establish new bank accounts when properly authorized by the School District. Further, the School District should communicate to employees they are not allowed to establish bank accounts on behalf of the School District without authorization.

Views of Responsible Officials and Planned Corrective Actions: The district will contact its banking institution and inquire as to how this may have happened. Furthermore, the district will communicate this issue to staff.



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SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

See Finding 2011-1 in Section II above. Finding 2011-8: Allowable Costs/Cost Principles U.S. Department of Education Title I, Part A Cluster

Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389 Award Numbers: 1015300910, 1015350910, 1115301011, 1115501011, and 1015550910 Award Year End: September 30, 2010 and September 30, 2011

Special Education Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 84.027 and 84.173 Award Number: 1104501011 and 1104601011 Award Year End: September 30, 2011 U.S. Department of Health and Human Services Temporary Assistance for Needy Families (TANF) Pass-through entity: County of Muskegon CFDA: 93.558 Award Number: 402222 JET-TANF

Award Year End: June 30, 2011

Head Start Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 93.600 Award Number: 05CH8258/10 and 05CH8258/11

Award Year End: November 30, 2010 and November 30, 2011

Specific Requirement: Allowable Costs/Cost Principles Criteria: Per OMB Circular A-87, to be allowable under federal awards, costs must be adequately documented.

Condition: During the course of our audit of the School District’s financial statements and single audit of federal award programs for the year ended June 30, 2011, we requested documentation supporting expenditure transactions. After selecting and requesting documentation, such as voucher packages, vendor invoices and time cards, we were notified by School District personnel that supporting documentation could not be provided for all selected cash disbursement and payroll transactions. Cause: We were instructed by School District personnel that 1) many of the missing documents were taken as evidence by the Michigan State Police in March 2011 and have not yet been returned to the School District and 2) the two voucher packages missing vendor receipts were purchases requiring payment by check at the time of purchase and the receipt was not subsequently turned into the Business Office to include with the voucher package.



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SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS—CONTINUED

Finding 2011-8: Allowable Costs/Cost Principles—Continued Questioned Costs: Since we were not able to perform audit tests for these selected transactions, we have categorized 100% of the associated expenditures as questioned costs for the following grants and amounts: Title I, Part A Cluster $30,261 Special Education Cluster 4,018 TANF 7,022 Head Start Cluster 1,946 Total $43,247

Context: The following chart shows the number of transactions by grant selected for testing and the number of transactions for which voucher packages, vendor invoices and time cards could not be located. Program Number of Transactions Number with Missing Documentation Title I, Part A Cluster Cash disbursements 52 14 Payroll 15 1 Special Education Cluster Cash disbursements 25 0 Payroll 10 5 TANF Cash disbursements 30 3 Payroll 5 2 Head Start Cluster Cash disbursements 28 2 Payroll 6 1 Effect: The expenditures could be disallowed, and the funds may be required to be returned to the associated grantor agency. Recommendation: The School District should follow its established procedures regarding documentation for all transactions.

Views of Responsible Officials and Planned Corrective Actions: This is an isolated incident directly

attributable to the ongoing criminal investigation by the Michigan State Police (MSP). Muskegon Heights Public Schools (MHPS) has never had an instance of missing voucher packages or employee time records prior to this investigation. MHPS was able to provide everything requested subsequent to the seizure of documentation by the MSP.



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U.S. Department of Education Finding 2011-9: Title I, Part A Cluster Eligibility

Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389 Award Numbers: 1115301011 and 1115351011 Award Year End: September 30, 2011

Specific Requirement: Eligibility Criteria: Per Title I, Section 1113(c) of ESEA, a local educational agency shall allocate funds received under this part to eligible school attendance areas or eligible schools, identified under subsections (a) and (b), in rank order, on the basis of the total number of children from low-income families in each area or school.

Condition: We noted that the allocation to one of six schools was in error due to using an incorrect low-income student count.

Cause: There was a misunderstanding between School District personnel and Michigan Department of Education (MDE) Office of Field Services personnel during the preparation of the school selection and allocation worksheet. The School District Title I Director believed that she was instructed to include the preschool students housed in the same building with the kindergarten students in the counts used to allocate Title I funds to eligible attendance areas. Questioned Costs: $3,246 Per documentation obtained by us, the low-income pupil count would have been approximately 144 students instead of 260 used by the School District. The Title I allocation to the kindergarten building should have been $209,952 instead of $379,080 using the same per pupil allocation of $1,458 per low-income pupil. The kindergarten building spent $213,198. The questioned costs being reported is the excess of the actual expenditures over the corrected building allocation ($213,198 - $209,952). Context: For 2009-10 and previous years, the elementary schools served K-6 grade spans in their geographic area. For 2010-11, the LEA changed the grade span groupings so those elementary buildings no longer had overlapping grade spans. The three elementary schools served the following unique grade spans for the entire LEA for 2010-11: kindergarten, grades 1 and 2, and grades 3 through 5. Grade 6 was moved to the middle school. In planning the 2010-11 Title I grant, the 2009-10 grade/building count data had to be converted to the new grade span groupings. The ‘converted’ data was reasonable for all buildings, except for the kindergarten building. The resident and low-income student counts were approximately double of what they should have been. Effect: The kindergarten building was allocated approximately double the amount of Title I funds that it was eligible to receive. Recommendation: The School District should continue to work with the Michigan Department of Education Office of Field Services to ensure the allocations to eligible schools are properly determined.

Views of Responsible Officials and Planned Corrective Actions: Due to the seizure of records by the MSP and turnover of key district Title I related staff, MHPS was not able to locate written communications and/or detail in regard to the calculation of individual school Title I fund allocations. MHPS has been in constant contact with the MDE Office of Field Services who monitors the Title I program and this issue has been corrected for 2011/12.



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SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS—CONTINUED U.S. Department of Agriculture

Finding 2011-10: Child Nutrition Cluster-Summer Food Service Program Pass-through entity: Michigan Department of Education CFDA: 10.559 Award Numbers: 1009000910, 1009001010, 1009001110, 1019000910, 1019001010, and 1019001110 Award Year End: September 30, 2010

Specific Requirement: Reporting Criteria: All claims for reimbursement must be supported by accurate meal count records indicating the number of meals served by category and type per 7 CFR Section 210.7(c).

Condition: During our reporting compliance tests, we noted that not all claims for reimbursement were supported by accurate meal counts by category.

Cause: Summer Food Service Program meal counts are done manually on Daily Meal Count forms and are then transferred to a summary sheet which is used for the monthly claims reporting. There were errors in transferring the number of meals served from the Daily Meal Count forms to the summary sheets.

Questioned Costs (under-reimbursement): $(4,744)

Context: We selected a 40% sample of all site counts reported on the three monthly claims for reimbursement. We compared the Daily Meal Count Forms (Forms) to the summary sheet used for the monthly claims reporting. We noted that for 8 of 10 sites tested the sum of the Forms did not agree to the totals on the summary sheet used to file claim for reimbursement.

Effect: For the Daily Meal Count forms tested, the claims for reimbursement filed with the Michigan Department of Education had both overstatements and understatements of meals served by site, netting to an under-reporting of 670 breakfasts and 1301 lunches in the aggregate amount of $4,744.

Recommendation: Monthly Summer Food Service Program summary reports should be reconciled with Daily Meal Count forms, and monthly claims for reimbursement should be reviewed for accuracy.

Views of Responsible Officials and Planned Corrective Actions: The MHPS Food Service contractor will have a district employee review the forms before they are submitted. The documents will also be signed by the preparer and reviewer going forward.



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U.S. Department of Agriculture Finding 2011-11: Child Nutrition Cluster

Pass-through entity: Michigan Department of Education CFDA: 10.553 and 10.555 Award Numbers: 111950, 111970, and 111960 Award Year End: September 30, 2011

Specific Requirement: Special tests and Provisions, Verification of Free and Reduced Price Applications Criteria: The SFA must report their verification activity and results to their respective State agencies per the September 11, 2003 final rule entitled ‘Determining Eligibility for Free and Reduced Price Meals in Schools – Verification Reporting and Recordkeeping Requirements.’

Condition: We noted that the verification results reported were not accurate.

Cause: The results of verification are not properly summarized nor are they reviewed by an appropriate person.

Questioned Costs: None

Context: Verification findings have been reported three of the last five years. Effect: The Michigan Department of Education forwards the information to the Food and Nutrition Service (FNS). This information is used by FNS to make decisions regarding the National School Lunch Program and if the information is inaccurate, it may adversely affect those decisions.

Recommendation: The School District should review its verification reporting procedures and provide additional training for staff who perform verification. The School District should also implement a procedure for reviewing both the results of verification and the verification report when completed.

Views of Responsible Officials and Planned Corrective Actions: This test will not be necessary in future

years. The district has been informed that it qualifies for the Community Eligibility Option for 2011/12 and subsequent years. All students attending Muskegon Heights Public Schools will receive free meals regardless of household income.

CLIENT DOCUMENTS

School District of the City of Muskegon Heights 2603 Leahy Street

Muskegon Heights, MI 49444

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SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS December 28, 2011 Michigan Department of Education Lansing, Michigan The School District of the City of Muskegon Heights respectfully submits the following summary of the current status of prior audit findings contained in the single audit report for the year ended June 30, 2010 dated December 1, 2010. SECTION II – FINANCIAL STATEMENT FINDINGS There were no findings in relation to the financial statements. SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

U.S. Department of Education Finding 2010-1: Title I, Part A Cluster Suspension and Debarment

Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389

Award Numbers: 0915300809 and 1015300910 Award Year End: September 30, 2009 and September 30, 2010

Specific Requirement: Suspension and Debarment Condition: We noted that a vendor used to provide parent workshop activities was contracted for services greater than $25,000 and the School District did not perform a verification check for covered transactions, by checking the Excluded Parties List System (EPLS) maintained by the General Services Administration, collecting a certification from the entity, or adding a clause or condition to the covered transactions with the entity. Recommendation: The School District should develop procedures for staff to follow and perform staff training to ensure compliance with suspension and debarment requirements. Current Status: See Finding 2011-1 for a similar finding reported during the single audit of federal awards for the year ended June 30, 2011.

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Michigan Department of Education December 28, 2011 Page 2 SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS—CONTINUED

U.S. Department of Education Finding 2010-2: Title I, Part A Cluster Eligibility

Pass-through entity: Michigan Department of Education CFDA: 84.010

Award Numbers: 0915300809 Award Year End: September 30, 2009

Specific Requirement: Eligibility Condition: We noted that the funds were not allocated to eligible schools in rank order. Recommendation: The School District should continue to work with the Michigan Department of Education Office of Field Services to ensure the allocations to eligible schools are in rank order. Current Status: See Finding 2011-9 for a similar finding reported during the single audit of federal awards for the year ended June 30, 2011.

U.S. Department of Education Finding 2010-3: Title I, Part A Cluster Allowable Costs/Cost Principles


Award Numbers: 0915300809, 1015300910 and 1015350910 Award Year End: September 30, 2009 and September 30, 2010

Specific Requirement: Allowable Costs/Cost Principles Condition: We noted that three of five parent involvement expenditure allocations to schools were not based on sing-in sheets for the parent involvement event. Recommendation: The School District should allocate costs to eligible schools based on the sign-in sheets as those should be the most representative documentation of where the relative benefits received. Current Status: See Finding 2011-8 for a similar finding reported during the single audit of federal awards for the year ended June 30, 2011.

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Finding 2010-4: Documentation of Equipment Management Procedures U.S. Department of Education Title I, Part A Cluster


Award Numbers: 1015300910 and 1015350910 Award Year End: September 30, 2010

Special Education Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 84.027, 84.173, 84.391 and 84.392

Award Numbers: 1004500910, 1004600910, 1004550910 and 1004650910 Award Year End: September 30, 2010

U.S. Department of Agriculture Child Nutrition Cluster

Pass-through entity: Michigan Department of Agriculture CFDA: 10.553, 10.555 and 10.559

Award Numbers: 101970, 101950, 101960, 101980, 090900 and 091900 Award Year End: June 30, 2010

U.S. Department of Health and Human Services Head Start Cluster

Pass-through entity: Muskegon Area Intermediate School District CFDA: 93.600, 93.708 and 93.709

Award Numbers: 05CH8258/10, 05CH8258/11 and 05SE8258/01 Award Year End: November 30, 2009 and November 30, 2010

TANF Pass-through entity: County of Muskegon CFDA: 93.558

Award Numbers: 402222 JET-TANF Award Year End: June 30, 2010

Specific Requirement: Equipment and Real Property Management Condition: During our detailed testing, we noted the School District did not have documented procedures to ensure compliance with the Equipment and Real Property Management requirement and not all equipment purchased in the current year was labeled or tagged in a manner to identify that it was purchased with federal funds.

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Finding 2010-4: Documentation of Equipment Management Procedures—Continued Recommendation: The School District should document their procedures for equipment management and tag all equipment purchased with federal funds. Current Status: This recommendation was implemented during the year ended June 30, 2011. No similar finding was reported during the single audit of federal awards during the year ended June 30, 2011.

Sincerely,

Dr. Dana M. Bryant Superintendent

School District of the City of Muskegon Heights 2603 Leahy Street

Muskegon Heights, MI 49444

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CORRECTIVE ACTION PLAN December 28, 2011 Michigan Department of Education Lansing, Michigan The School District of the City of Muskegon Heights respectfully submits the following Corrective Action Plan for the year ended June 30, 2011. Name and address of independent public accounting firm:

Brickley DeLong, P.C. P.O. Box 999 Muskegon, Michigan 49443

Audit period: June 30, 2011 The findings from the Schedule of Findings and Responses for the year ended June 30, 2011 are discussed below. The findings are numbered consistently with the numbers assigned in the schedule. SECTION II – FINANCIAL STATEMENT FINDINGS Finding 2011-1: Suspension and Debarment Compliance U.S. Department of Education Title I, Part A Cluster Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389 Award Numbers: 1115301011 and 10155550910 Award Year Ends: September 30, 2011 Special Education Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 84.027 Award Numbers: 1104501011 Award Year Ends: September 30, 2011

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Michigan Department of Education December 28, 2011 Page 2 SECTION II – FINANCIAL STATEMENT FINDINGS—CONTINUED Finding 2011-1: Suspension and Debarment Compliance—Continued U.S. Department of Health and Human Services Temporary Assistance for Needy Families (TANF) Pass-through entity: County of Muskegon CFDA: 93.558 Award Numbers: 402222 JET-TANF Award Year Ends: June 30, 2011 Specific Requirement: Suspension and Debarment

Recommendation: The School District should follow its established procedures to ensure compliance with suspension and debarment requirements. Action Taken: Muskegon Heights Public Schools are currently updating their policies and procedures to address this potential issue moving forward. Finding 2011-2: MATERIAL WEAKNESS—Procedures for Budgeting Act Compliance and Deficit Reduction Plan Compliance Recommendation: The School District should establish policies and internal controls which will ensure administrative compliance with the Michigan Uniform Budgeting and Accounting Act, the Board of Education’s approved budgetary appropriations, and the deficit reduction plan filed with the State of Michigan. Action Taken: The School District is currently working with the Michigan Department of Education and the Muskegon Area Intermediate School District to develop a plan to eliminate its fund deficit. Finding 2011-3: MATERIAL WEAKNESS—General Ledger Account Balance Reconciliations Recommendation: The utilization of a monthly closing checklist and written procedures would encourage personnel to review the accuracy of month end balances through analysis of account activity, comparison to supporting documentation and/or reconciliation with detailed schedules. Action Taken: General ledger account balances will be reconciled quarterly. Appropriate schedules will be maintained by the preparer.

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Michigan Department of Education December 28, 2011 Page 3 SECTION II – FINANCIAL STATEMENT FINDINGS—Continued

Finding 2011-4: MATERIAL WEAKNESS—Cash Disbursement Check Release Procedures Recommendation: The School District should follow established internal control procedures over the preparation and mailing of vendor and payroll withholding cash disbursement checks. Action Taken: The district will submit checks to vendors within one week of processing. Checks will no longer be held by the district. Finding 2011-5: Procedures for Timely Deposit and Posting of Cash Receipt Transactions Recommendation: The School District personnel should comply with internal control procedures over the timely depositing and posting of cash receipt transactions to the general ledger. Action Taken: Cash receipts will be deposited into the district bank account on Tuesdays and Fridays. They will be recorded to the ledger on the next Monday following bank deposit. EFT wires will be posted to the ledger by the 15th day of the following month, coinciding with the bank reconciliation schedule. Finding 2011-6: Accounts Payable Cut-off Procedures Recommendation: The School District should improve the effectiveness of its established accounts payable cut-off procedures, including staff training to improve the accounts payable cut-off to help ensure expenditures are reported in the proper period. Action Taken: Goods received within the reporting year will be recorded to accounts payable. Goods not received by June 30 will be recorded in the next fiscal year.

Finding 2011-7: Procedures for the Establishment of Authorized Bank Accounts

Recommendation: The School District should notify its banking institutions to only establish new bank accounts when properly authorized by the School District. Further, the School District should communicate to employees they are not allowed to establish bank accounts on behalf of the School District without authorization. Action Taken: The district will contact its banking institution and inquire as to how this may have happened. Furthermore, the district will communicate this issue to staff.

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Michigan Department of Education December 28, 2011 Page 4 SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

See Finding 2011-1 in Section II above. Finding 2011-8: Allowable Costs/Cost Principles U.S. Department of Education Title I, Part A Cluster Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389

Award Numbers: 1015300910, 1015350910, 1115301011, 1115501011, and 1015550910 Award Year End: September 30, 2010 and September 30, 2011 Special Education Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 84.027 and 84.173 Award Number: 1104501011 and 1104601011 Award Year End: September 30, 2011 U.S. Department of Health and Human Services Temporary Assistance for Needy Families (TANF) Pass-through entity: County of Muskegon CFDA: 93.558 Award Number: 402222 JET-TANF Award Year End: June 30, 2011 Head Start Cluster Pass-through entity: Muskegon Area Intermediate School District CFDA: 93.600 Award Number: 05CH8258/10 and 05CH8258/11 Award Year End: November 30, 2010 and November 30, 2011 Specific Requirement: Allowable Costs/Cost Principles Recommendation: The School District should follow its established procedures regarding documentation for all transactions. Action Taken: This is an isolated incident directly attributable to the ongoing criminal investigation by the Michigan State Police (MSP). Muskegon Heights Public Schools (MHPS) has never had an instance of missing voucher packages or employee time records prior to this investigation. MHPS was able to provide everything requested subsequent to the seizure of documentation by the MSP.

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Michigan Department of Education December 28, 2011 Page 5 SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS—Continued

U.S. Department of Education Finding 2011-9: Title I, Part A Cluster Eligibility Pass-through entity: Michigan Department of Education CFDA: 84.010 and 84.389 Award Numbers: 1115301011 and 1115351011 Award Year End: September 30, 2011 Specific Requirement: Eligibility Recommendation: The School District should continue to work with the Michigan Department of Education Office of Field Services to ensure the allocations to eligible schools are properly determined. Action Taken: MHPS has been in constant contact with the MDE Office of Field Services who monitors the Title I program and this issue has been corrected for 2011/12. U.S. Department of Agriculture Finding 2011-10: Child Nutrition Cluster-Summer Food Service Program Pass-through entity: Michigan Department of Education CFDA: 10.559 Award Numbers: 1009000910, 1009001010, 1009001110, 1019000910, 1019001010, and 1019001110 Award Year End: September 30, 2010 Specific Requirement: Reporting Recommendation: Monthly Summer Food Service Program summary reports should be reconciled with Daily Meal Count forms, and monthly claims for reimbursement should be reviewed for accuracy. Action Taken: The MHPS Food Service contractor will have a district employee review the forms before they are submitted. The documents will also be signed by the preparer and reviewer going forward.

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Michigan Department of Education December 28, 2011 Page 6 SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS—Continued

U.S. Department of Agriculture Finding 2011-11: Child Nutrition Cluster Pass-through entity: Michigan Department of Education CFDA: 10.553 and 10.555 Award Numbers: 111950, 111970, and 111960 Award Year End: September 30, 2011 Specific Requirement: Special tests and Provisions, Verification of Free and Reduced Price Applications Recommendation: The School District should review its verification reporting procedures and provide additional training for staff who perform verification. The School District should also implement a procedure for reviewing both the results of verification and the verification report when completed. Action Taken: This test will not be necessary in future years. The district has been informed that it qualifies for the Community Eligibility Option (CEO) for 2011/12 and subsequent years. All students attending Muskegon Heights Public Schools will receive free meals regardless of household income.

If the Michigan Department of Education has questions regarding this plan, please call Dr. Dana M. Bryant at (231) 830-3221. Sincerely,

Dr. Dana M. Bryant Superintendent



December 28, 2011 To the Board of Education School District of the City of Muskegon Heights We have audited the financial statements of the School District of the City of Muskegon Heights for the year ended June 30, 2011, and have issued our report thereon dated December 28, 2011. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards and Government Auditing Standards and OMB Circular A-133, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you during our conference on July 13, 2011. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings

Qualitative Aspects of Accounting Practices

Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the School District of the City of Muskegon Heights are described in Note A to the financial statements. As described in Note A to the fund financial statements, the School District of the City of Muskegon Heights changed accounting policies related to presentation of fund balance by adopting Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, during the year ended June 30, 2011. The accounting change affected the presentation of fund balance in the governmental funds but did not change total beginning or ending equity. We noted no transactions entered into by the School District during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were:

Management’s estimate of depreciation is based on estimated service lives of the specific assets utilizing straight-line methods. Management’s estimates for Act 18 revenue, Special Education Billback expense and Special Education Transportation revenue and expense were determined by the Muskegon Area Intermediate School District (MAISD) based on member school district estimated expenditures and the number of students receiving services from each district. Adjustments are made by the MAISD in the subsequent fiscal year for final audited expenditures and pupil counts.

BRICKLEY DELONG

Board of Education School District of the City of Muskegon Heights December 28, 2011 Page 2

Management’s estimate of the liability for OPEB under GASB 45 was based upon certain actuarial assumptions. Management’s estimate of the liability for compensated absences is based on accumulated sick days at current contract rates.

Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were:

The disclosure of related party transactions in Note L to the financial statements. The disclosure of General Fund fund deficit in Note B.

Difficulties Encountered in Performing the Audit We encountered difficulties in obtaining documentation that management stated was in the possession of the Michigan State Police. We were able to perform alternative procedures related to some of the missing documentation and other missing documentation was treated as it did not exist and an audit finding was issued for those items. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. During out audit, we noted five uncorrected misstatements with an aggregate effect to overstate fund balance and net assets by $103,738. Management has determined that this effect is immaterial to the financial statements taken as a whole. In addition, as a result of audit procedures, cash and liabilities totaling $675,096 were grossed up due to held checks. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated December 28, 2011. Management Consultations with Other Independent Accountants In some cases, management of organizations may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the School District’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations by the management of the School District of the City of Muskegon Heights with other accountants.

BRICKLEY DELONG

Board of Education School District of the City of Muskegon Heights December 28, 2011 Page 3 Other Audit Findings or Issues

We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the School District’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Board of Education and management of the School District of the City of Muskegon Heights and is not intended to be and should not be used by anyone other than these specified parties. Sincerely,

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